BluefoxToday blog : August 2010

I posted a blog yesterday "Strategic Defaults are a big part of the problem" giving my reasons why I feel that Strategic Defaults Are A Contributor To Guideline Changes, and that i would post another blog to point out some of the Guideline changes that have come about because of Foreclosures and Shortsales. I feel very strongly about this issue, because I see firsthand every day the impact that Foreclosures are have on the ability of others to purchase a home, that anything that voluntarily further contributes to that is inexcusable in my opinion.  Strategic Defaults are completely voluntary and a CHOICE to do so, and NOT out of NEED.  I started off yesterday's blog with my definition of what I understand a Strategic Default to be, so I will state it again:

Strategic Default: A foreclosure that results NOT from the Homeowners inability to make his/her mortgage payment, but as a result of the Homeowners CHOICE to not make the mortgage payment, because the property has decreased in value and presently is no longer worth what they paid for it.

Some have tried to justify this behavior by putting the blame on those who received TRAP money, and wrongfully kept it.  I agree that what these institutions did was wrong, but even if they had used the money like I believe they were supposed to, it would not have been used for those doing Strategic Defaults.  The money as I understand it, was intended to help homeowners that are in trouble with their mortgages, and had no other choice but to be Foreclosed on or do a Short Sale.  It was not intended for those who are voluntarily walking away from their properties.

In my opinion because of needless Strategic Defaults we have seen an even greater tightening of the Lending Guidelines than we would have otherwise.  There is no dispute that Foreclosures and Short Sales have caused Lending Guidelines to tighten and change.  It was a given that as banks experienced loses they would make adjustments to the Guidelines by which they would lend by.

The first changes that we saw were, the almost complete elimination of Stated Income type loans.  I say almost because I have been told that they can still be obtained.  I can't do them, and I don't know who can, but I am told they still exist.  Stated Income filled the need for the Self-Employed who make enough to purchase and afford a mortgage, but because of the way they report their income they have difficulty document it.  So now Self-Employed people are having a very hard time purchasing or refinancing a home since Stated Income Loan Programs have been virtually eliminated.

This was quickly followed by a reduction in the Debt-To Ratio Limits.  At one time I could do a Conventional Loan with a Total-Debt-To-Income of 67%.  Yes you heard that right, 67% of total Gross (not net) Income.  This obviously needed to change, and as Foreclosures and Short Sales increase, the reduction in the Total-Debt-To-Income Limits for Conventional Loans slowly decreased down to 45%.  It does not take a mathematician to figure out that reduction has taken a huge number of people out of the market.

Downpayment requirements have also tightened as Foreclosures and Short Sales have risen.  Programs like My Community and Flex 100 as well as other 100 financing programs have disappeared.  Again it does not take a genius to figure out the impact that this has had, especially on First Time Homebuyers.

FHA will on October 4^th change their Guidelines once again.  The Annual Premium (MI) will change from a .55 multiplier to a .85 multiplier for loans with LTV's of less than 95% and .90 for loans with LTV's of over 95%.  This is going to have a HUGE impact on Borrowers qualifying for a loan, because it will significantly raise their Debt-To-Income Ratio's.  There are many that have been qualified that will no longer qualify come October 4^th.

There are many other changes that have contributed to the decreased number of qualified Buyers, due to Guideline changes that have taken place because of Foreclosures and Short Sales.  So I hope you can see why I am so passionate about anything that VOLUNTARILY further increases and contributes to more and more Foreclosures.  As Foreclosures and Short Sales increase the more Guidelines changes there will be, and the less qualified Borrowers we will have.  There is nothing profound about that, it is a proven fact.

So to encourage or even justify a VOLUNTARY behavior that contributes to this is mind boggling to me.  And what is even more mind boggling is that the justification is being mostly done by those that sold these depreciating value houses to those doing the Strategic Defaults.

I am in the business of doing loans, Realtors in the business of selling houses, Appraisers are in the business of appraising houses at their current value.  None of us are in the business of predicting the future.  If we could tell what the future will bring, we would all be very rich.  Yet the Lending industry is suppose to take the loss because they lent money to people who QUALIFIED at the time (many of the foreclosures and short sales were not a result of subprime loans and loans done by shifty lenders).  Lenders lent money and qualified Borrowers based on the Guidelines of the time.  To sit back now and say well they should not have done that is almost laughable.  Since when did that stop Realtors from selling those so called over priced houses, Appraisers from appraising those house, and Loan Officers from doing the loans?

Everyone in this Industry is presently being affected by what is happening.  This is our lively hood.  Our Borrowers and Buyers are being affected by what is happening.  So I can't understand how anyone can defend or try to justify someone VOLUNTARILY participating in a behavior that will further take Borrowers and Buyers out of the market.

This blog is already way to long, so I will stop here.  But if you have taken the time to read all of it, and I apologies for its length, I can't see how you can come to any other conclusion besides that Strategic Defaults Are A Contributor To Guideline Changes and have affected the ability of Buyers to purchase or refinance a properties.

Recent headlines, as well as some of my own blog posts, have some consumers wondering: "Should anyone buy a home in today's market?" And the answer is a definite, but qualified, almost enthusiastic, yes. An article in the NY Times, points out some of the obvious benefits of home ownership:

● A mortgage can be a type of forced savings

● Home owners don't have to deal with the difficult or fickle landlords who may decide to sell or experience foreclosure

● Rental units may not be available in the area in which you wish to live.

And in previous posts I've pointed out that home ownership can provide:

● An anchor to the community (Owners are more involved in community, civic, and political affairs)

● Stability (Owners move less often and are more likely to develop relationships with neighbors)

● Freedom (Owners can customize or modify their accommodations as they wish and as often as they wish and will reap the financial benefits of their improvements)

● Pride of ownership (Becoming a home owner provides a sense of accomplishment)

● Security (Neighborhoods filled with owners have less crime, and strangers do not have keys to your home)

● Homes provide a place for family activities (Backyard swing sets, tree houses, or room for family pets)

And while the recession has placed the focus upon the financial risks associated with a home purchase, when purchased wisely, homes can be financially beneficial. Because of the leveraged factor, a shrewd purchase sometimes offers significant returns. Unless you are an investor, however, homes should not be purchased for investment potential.

Should anyone buy a home in today’s market? Yes, but not everyone who is qualified. There are numerous considerations, and for some a purchase could prove disastrous. However, those who wish to own a home and who are financially stable should certainly consider their options; and having an experienced buyers’ agent to help locate the best home in the best location, provide expert guidance through the complex purchase process is essential.

The Housing Guru: The expert source for all your housing questions

Mountain's Edge July 2010 Real Estate Resale Market Report:

• Listings (8/15/2010):  277
• Under Contract (8/15/2010):  314
• Sold July 2010:  62

Since Last Month:  Listings are UP +28, Pendings are DOWN -11, Sales are DOWN -26

Last Month's Mountain's Edge Market Report

View Mountain's Edge Homes For Sale Here (Updated Daily)

More Information on Mountain's Edge Real Estate Here

More Las Vegas Communities Here

Lending guidelines have been tightening and will continue to tighten for the foreseeable future, and Strategic Defaults are a big part of the problem why this is happening.  Before I go any further I want to give my definition of what I understand a Strategic Default to be:

Strategic Default: A foreclosure that results NOT from the Homeowners inability to make his/her mortgage payment, but as a result of the Homeowners CHOICE to not make the mortgage payment, because the property has decreased in value and presently is no longer worth what they paid for it.

This blog is written based on that definition and that being MY understand is of a Strategic Default is.  If you understand a Strategic Default to mean something else, then this blog does not apply to you.  So if you are going to defend Strategic Defaults, do so based on the above definition, and not on some other definition of what you believe a Strategic Default to be.

Foreclosures and Short Sales, have become a huge problem for the Lending Industry, so when you further throw in self imposed foreclosures like a Strategic Default, you have an even bigger mess.  While in the short term this is a problem for the Lending Industry, in the long term it will be the problem of those who did not have a choice in the circumstances that resulted in them having to do a Foreclosure or Short Sale.  Unfair, YES, but outside of creating a "Moral Committee" to decide who really needed to do a Foreclosure or Short Sale, there is only one other alternative, and that is to treat Foreclosures, Short Sales, and Strategic Defaults all the same.  And there you have the problem that the HAVES (Strategic Defaults - those with money to pay the mortgage, but CHOOSE not to) and the HAVE NOTS (those that do not have money to pay the mortgage, (foreclosure), or have to sell for reasons out of their control and do not have enough value in their property, (short sale)).  The Lending Industry might take a short term lost, but it is the HAVE NOTS that pay for the lose in the long term.

I understand why someone might not want to continue to pay on a property that PRESENTLY does not have the value that they paid for it, but when they purchased the house, was it a place of shelter, and a place that they were choosing to make a home for their family, or was it a purchase to create cash-flow.  If it was for shelter, and a home for their family then what the present value is should not be an issue.  The market will change sooner or later, and they will then have increased equity in the property.  If it was to create cash-flow, then they made a very unwise investment and should be the ones to suffer the lost, and not everyone else.

When you make a commitment to purchase a house you are held to that commitment.  The bank agreed to lend you the money that YOU asked for to purchase a house, and in return you agreed to pay them them back the money that YOU asked for to purchase the house.  Now I have heard some say that it is their right to choose to not to pay the bank back the money that they agreed to pay back, and just let the bank have the house.  That is not completely true.  There is no where that I find in the Note or Mortgage that gives them that right.  But I do see where the Bank has the right to take the property if the homeowner does not make the mortgage payments.  If I am wrong please state the section of those documents that give them that right.

I sympathize with Homeowners that are losing their homes.  That they and their families are going through tough times in their life, and hope that the complications in their life can be limited as much as possible.  But I do not have any sympathy for those that fit the definition of a Strategic Default which I gave above.  These people are abusing the system, and making life even more complicated and stressful for those that do not have control of the situation that they find themselves in.

Strategic Defaults are a big part of the problem in today's Lending Industry mess.  And those that support what these people are doing really need to think through their position.  Regardless of what your position is on the greedy Banks and Lenders, it is not a justification for the HAVES to further complicate life for the HAVE NOTS.

I hope to follow up on this blog "Strategic Defaults Big Part Of The Problem" soon to give some examples of how Foreclosures and Short Sales have impacted Lending Guidelines, and have created changes that are eliminating many Buyers from the market.  There is still plenty of money to lend, it is qualifying for it that has become more difficult.

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Info about the author:

George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308, gsouto@mccuemortgage.com, or visit my McCue Mortgage Homepage.

While some point to the possibility that home prices and sales may once more turn down, the reality is that housing isn’t entering a double-dip; it’s merely continuing its journey. Homeowners or potential home buyers want to know what’s really happening; but the news is so confusing that it’s virtually impossible to tell. For many the confusion arises from the surge in sales and prices that began last fall and continued into the spring, a time when economists and pundits were quick to call the housing bottom.

● Jim Cramer even set the specific date for the bottom, June 30, 2009, telling consumers to go out and buy.

● Alan Greenspan agreed and said housing would bottom by the middle of 2009.

● Housing Predictor said that most of the market would see bottom between April and June of 2009.

● Moody’s put the date a bit further out, guessing Q-3.

● Money Magazine said to wait until the end of that year.

● Late in 2009, the NY Daily News gushed with optimism, “Home prices are nearing the end of a three-year slump and should rise in 2010.” They based their prediction on the polling of forty-one economists, with all but one agreeing that a bottom had been reached or would be reached within a year.

Many of the positive predictions came about as a result of the Housing Tax Credit, which, in some areas created a buying frenzy with happy sellers raising prices to compensate for the government’s gift.

More recently however, negative voices have been predicting a “double dip” for the housing market. It’s no wonder that buyers are sitting on the sidelines or that sellers are either elated because “home prices are rising,” or depressed because of the coming “double dip. On Wednesday, an article on HousingWire stated, “Housing’s double dip is here.

However, I don’t believe we’re entering a “double dip,” for housing never truly reached a bottom. The anticipated stabilization that was to be created by the multitude of recent government programs never materialized. The additional sales and price increases that resulted from the Tax Credit was artificial and failed to provide the predicted results, doing nothing more than shuffling the year’s sales numbers, while costing taxpayers billions. There was no wave of “new” buyers, for only a miniscule number of permanent renters were enticed to become homeowners. No, we need not fear a double-dip; the housing crisis that began in most areas in 2007 is still going strong, and a comparison of the annual sales numbers will quickly point that out.

Certainly we can find comfort if “our” area is doing okay, but the bulk of the country is far from okay. However, buyers and sellers shouldn’t be fearful of this news of a “double dip,” as if there is some new villainy set to prey on housing. The market is merely continuing the process of being re-defined, a process that includes lots of ups and downs. And while no one can be certain of the ultimate outcome, those who pounce on this latest prediction de jour will remain as confused as ever.

The Housing Guru: The expert source for all your housing questions

I had a chit chat with a nice out of state all cash investor today.  She has been led to believe that she can flip homes in this environment.  Resale homes that is.

She has been looking for several months as I understand and she had been given some poor advise.

I wasn't willing to take her on!

WHY?

Right now Las Vegas area listings are increasing with a rapid pace due to the first time buyer tax credit.  "Sellable" inventory has increased also.  I was right in my January article - the investors have been left holding the bag as I watch their overpriced inventory gather dust. 

This stuff would have been snatched up in a New York Minute back in April (tax credit buyers) but with calculated price reductions by bank asset managers now it just seems to stand out like a sore thumb.

Even the true flippers (the ones that purchase at the actual foreclosure/trustee sale) are stating that their margins are tight these days.

I would never, in our volatile Las Vegas real estate environment advise someone that doing this is a walk in the park without checking with the customer/client to make sure they have the stomach & means to hold the property in the event of another decline (which could happen!)

Maybe this is my odd combo of altruistic/narcissistic side  of me that assumes I will get a sale and then consequently a listing.  Who needs another person pissed off at you because you can't sell their house at the margin they expect?  Not even the best marketing machine in the world could do it..........in this environment.

It is possible to do this, just not highly probable to see the results you want.

You can see my Las Vegas Market Report Graphs right here if you don't believe me.

It looks like the Federal Housing Finance Agency - or FHFA - is getting ready to introduce new regulations later this year that would prevent Fannie Mae, Freddie Mac and the Federal Home Loan Banks - FHLBanks - from investing in mortgage loans tagged with these now notorious private transfer fees. This would then effectively bring major government-controlled home loan players in agreement about them, because FHA already is, according to HUD's regulations, banned from insuring mortgages on homes with private transfer fees. They are considered "legal restrictions on conveyance" in FHA talk.

These private transfer fees are brought to life by covenants attached to a deed that result in a payment to a third party every time a home is sold. The fee generally is 1% of the sales price and paid by the buyer, who may or may not know about it until he's sitting all excited at the closing table. Finding out about it typically elevates his blood pressure even further. Home builders are the ones who usually - but not always - would do this type of thing, giving them an additional, effortless revenue source for 99 years, the standard duration of the arrangement.

FHFA finds several problems with them. They hike home ownership costs up front, make property transfers more complicated and sometimes legally uncertain because regular title searches may not reveal their existence, particularly after multiple ownership changes. They can cause trouble elsewhere, too. Secondary mortgage market investors, lenders and title firms are vulnerable to possible hidden liens and title flaws.

The increased cost factor to home buyers and legal issues for mortgage industry participants are by themselves enough to cause concern. The other big issue is that the home builder who sets up the private fee structure does not provide any service or product to enable him to honestly earn the continuous stream of income. When it's finished with a subdivision, it's gone but would still collect for a long time money for free. Frankly, this seems to take us back to the creative instruments Wall Street not so long ago came up with that ultimately led to the current mortgage and real estate meltdown.

FHFA is on the right track to decisively curtail this from spreading any further. At the moment government entities control over 90% of the mortgage market, so its upcoming regulation will effectively put a stop to private transfer fees, for the good of consumers and the home loan and housing industries.

We’ve all heard the news reports about the potential for a double-dip in housing, and perhaps, the overall economy. Unemployment seems out of control; debt levels are becoming unmanageable; and many are wondering what the future holds for the housing market. Where home prices going and what is the potential for prices to recover to the levels of 2005/2006?

There are lots of opinions, but here are some points to consider:

● The recent meeting to discuss the future of housing, including the GSEs Fannie and Freddie, while generating lots of news, was not expected to produce anything of significance that would improve the situation in the short term. The billions of taxpayer liability associated with Fannie and Freddie—extreme “worst-case” estimates range as high as $1 trillion—cannot be erased. And if the structure of these entities is significantly changed to remove risk to taxpayers, interest rates will increase and home sales will suffer.

● According to many experts, structurally high unemployment will be with us for years. And, those without jobs or who are underemployed lack the financial ability to purchase homes. New home sales follow the employment rate, and with the permanent loss of millions of manufacturing and other jobs, millions of potential buyers have been removed from the housing market.

● Monetary policy seems confused at best. With disagreement from both inside the Fed as well as among some inside the administration, there seems little doubt that the “green shoots” once reported, have faded and died. Printing money on a massive scale ultimately leads to inflation; and borrowing and spending has left us deeply in debt, so deeply in fact, that in less than eight years interest on the national debt will equal $1 trillion, the largest single budget item—and a good portion of those dollars will be paid to bondholders in China.

● In the first quarter of 2009, almost half a million small businesses (less than 100 employees) closed their doors, costing about 1 million jobs. In a struggling economy, such job losses will continue, removing a significant segment of new home buyers from the marketplace.

● The latest foreclosure numbers show that they are spreading into the heartland. While much of Middle America and the northwest had avoided the worst of the problem, default notices have recently increased significantly, with more than a third of the states experiencing a doubling of foreclosures.

Those who are unwilling to face the reality that the U.S. is in serious economic trouble and that our “leaders” seem unable or unwilling to take the steps necessary to bring about a recovery, may ignore the facts, but that doesn’t change them. And while economic conditions vary dramatically from one part of the country to another, the economy in general is very ill, and the experimental “medicines” that have been administered have brought only temporary relief. A long-term cure must be proposed, yet many economists and political observers see that as unlikely.

Proponents of an additional and perhaps larger stimulus have pointed out that current winding down in the economy is due to the effects of the first stimulus wearing off. What they seem to ignore is the very real fact that a temporary stimulus provides only temporary relief. The original stimulus, just like Cash for Clunkers and the Homebuyer Tax Credit, did little or nothing to create sustainable economic improvement. Such artificial measures do little other than to provide politicians with quick, feel-good results intended to demonstrate their commitment to solving the problem; and feel good solutions never last. It’s time to wean our “leaders” and our citizens from the belief that success must be measured in short term results.

So, where are home prices going? Is recovery just around the corner? No. Many years will pass before homeowners feel that the housing market has recovered; and the ensuing period will be fraught with uncertainty and additional foreclosures. The expectation that home values will quickly return the their recent highs or that prices must continually increase will be replaced by the reality that prices, in general, will follow the rate of inflation. To do otherwise would mean that homes would soon be beyond the reach of the average buyer. That’s the reality, and that’s where home prices are going.

The Housing Guru: the expert source for all your housing questions

**ACTIVE Las Vegas Real Estate Inventory Rises for the Third Straight Month!**

Active Las Vegas Residental Resale MLS Inventory has risen for the third straight month.  This is mainly due to first time buyers exhausting the market due to their tax credit expiring - this is not due to the shadow inventory fairy bringing us more inventory!

Read more about Las Vegas Real Estate Inventory Analysis here and consumers may comment on this post.

Las Vegas Area Real Estate Market Watch was created for informational purposes only. 

This is for all the buyers wondering "where is the inventory"?  The inventory is here, this graph shows that buyer interest is extremely high and gobbling up all that new inventory coming online!

This is also for people saying "shadow inventory exists"!  Well I believe it exists but it also exists in short sales which has tripled to quadrupled it's formerly stagnant close ratio since late spring.

These are Listing/Under Contract & Pending/Sold Trends from December 2007-July 2010.

Contracted closings are stalled because of the large amount of short sales that are contracted.  Inventory rise is directly related to the tax credit expiring.

When major upheaval pummels a real estate market, it as a rule leads to home value depreciation. That's the easy part. The hard part is to try to put an actual number on the price reversal. A team led by the Massachusetts Institute of Technology, or more commonly MIT, recently conducted some deep research to determine how much a home's value deteriorates because of a foreclosure. The current housing and mortgage meltdown obviously got them thinking and they decided to dig up some realistic answers.

The group looked at 1.8 million real estate sales in Massachusetts spanning from 1987 all the way to 2009, which then includes data from the present housing collapse. After spending considerable time shifting through the massive amount of information in front of them they at last were comfortable in concluding that - on average - a foreclosure slices 27% off a home's value. That is a high number, and subject to some serious debate.

The same MIT team also studied other forced sales and their effect on real estate values. When the homeowner goes into bankruptcy, the property's value drops 3%. And when a homeowner death brings about a sale, the price sinks on average 5-7%. Clearly, a mortgage foreclosure has a much more profound impact on the underlying value than the other two.

The main reason to the wide separation between the different forced sales is the condition of the home. Homeowners sliding inevitably toward foreclosure will spend the money they still have on everyday necessities and not on property upkeep. That's stage one. Stage two is when mortgage lenders foreclose and then generally neglect their REOs - real estate owned - allowing properties to fall into further disrepair. There clearly are two forces here steadily gnawing on the property's value. In the other two instances neither one is prominently present.

As the MIT research proves, it would be to the mortgage providers' benefit to maintain their REOs to attract top dollar when selling. 27% shortfall should make them think again about proper maintenance. But that often is not the case in this current real estate downturn.