FDIC: Worst Market Since the 1930s

Take a look at what the FDIC wrote concerning the housing crisis (emphases mine).

We are now undergoing a self-reinforcing cycle of default, foreclosure, home price declines, and mortgage credit contraction, the likes of which we have not experienced since the 1930s. The annual number of U.S. foreclosures nearly doubled between 2005 and 2007 to more than 1.5 million, and some private forecasts project 2 million foreclosures or more during 2008 if action is not taken now. Beyond their immediate costs, which include hundreds of thousands of displaced families and tens of billions of dollars in financial losses, these defaults and foreclosures are now resulting in wider problems for our communities and our economy.

When this happened in the early 1990s, the FDIC helped shut down banks and liquidate their assets. Now it says we’re facing a crisis that’s even worse. If bank failures begin again in earnest, the FDIC will have a lot of work on its hands.

Home prices in ten large U.S. cities fell on average by 13.6 percent in the year ending in February, and home price declines of more than 15 percent were registered in major metropolitan areas of California, Nevada, Arizona, Florida, and Michigan. A large inventory of unsold homes points to a protracted oversupply of homes. Of the net 6.6 million homes added to the U.S. housing stock since 2004, more than half are currently vacant. The problem is made worse by the difficulty of securitizing mortgage debt outside of the government-sponsored enterprises. The data show that private MBS issuance in the fourth quarter of 2007 was down 80 percent from the same quarter the year before, and originations of nonconforming loans financed by private mortgage backed securities (MBS) declined by similar amounts.

More than half of the unsold homes are vacant. That’s 3.3 million empty houses. Empty houses are eventually attacked by weather, vandals, and squatters. What will happen to property values then?

Because of the high costs associated with foreclosure (which can range up to 40 percent of the value of the property), it is in the interest of both borrowers and lenders to avoid this remedy whenever possible. But the progress of loan modifications to date has been too slow. A recent study indicates that seven out of ten seriously delinquent borrowers are not yet in any loss mitigation process, and that new loans are becoming delinquent faster than the servicers can modify them on their own.

Loan modifications are going to be an important part of bringing the housing market to a recovery point. I don’t think it’s the government’s job to make sure that these modifications take place. Rather, lenders have every reason to preserve themselves financially by increasing the efficiency of their loss mitigation efforts and by selling their problem loans to investors who are skilled at dealing with delinquent loans.

Subsidizing lenders who are unable to do this simply subsidizes their irresponsible lending choices and business practices. Subsidizing homeowners who put nothing down and are now in distress has the effect of penalizing homeowners who used substantial down payments to buy their properties but have lost most or all of their equity. (See Richard Martens’ post on homeowner bailouts.)

Investors are already responding to lenders’ needs by doing short sales, buying REOs, and purchasing pools of unwanted mortgage paper. Profits exist where lenders need help, and the strength of that need is going to increase through the coming recession.

Foreclosure Summit 2008

We just got back from Vena Jones-Cox’s Foreclosure Summit. The Summit provided us with a unique opportunity to network with real estate investors in the Indianapolis area. Here are highlights of a select few among many of the seminars from the four-day conference:

• Donna Bauer, otherwise known as The NoteBuyer (Inc.), taught a full-day seminar on buying and profiting from real estate backed notes. By special request from last year’s Foreclosure Summit registrants, she taught a special full-day seminar.
• Steve Dillon, a former experienced loss mitigation trainer at EMC Mortgage, spoke for two sessions on negotiating successful short sales.
• Kathy Kennebrook presented a seminar on raising private money.
• Don DeRosa, a real estate investor and nationally known teacher who presented in Oklahoma City last year, presented a seminar on negotiation techniques and a seminar on buying houses subject to the existing financing.
• Vena Jones-Cox and Missy McCall-Hammonds taught a seminar on building real estate business systems.

We noticed that investors are beginning to focus more and more of their energy on three strategies:

• Short Sales
• Bankruptcies
• Discount Note Buying

There was a feel of excitement in the air throughout the entire conference.

Vena Jones-Cox and Lucy Brenton gave us some interesting insights about the mortgage market. They explained why the opportunities for distressed property investments are only going to get better and better.

More about this in the next post!

Real Estate Investors’ Clubs

I just got back from a Mastermind Group meeting sponsored by Millionaire Possibilities, a real estate investors’ club in Oklahoma City.

If you’re considering investing in real estate, it’s a good idea to attend the investor club meetings in your area. The more experienced members of these groups are in touch with the market. They can help you develop a business strategy, even a slower market like this one.

The clubs are also a good way to get leads on properties, find contractors, and network with other investors.

Here’s a quick summary of how the clubs in the Oklahoma City area have helped us in the last month:

• We received leads on two newly built, overleveraged houses in Oklahoma City through members of the club. Since the homeowners have missed payments and owe more than their houses are worth, we’re doing short sales on both.
• One of our short sales was approved in Edmond, OK. We’re listing it on the MLS through a club member.
• We bought a house in Edmond by taking over the existing loan and did three weeks of rehab work using contractors from the clubs. The first person who walked through the finished house put the house under contract and has agreed to close by May 1.
• Three members of the club called me to ask for advice about whether to buy houses they had put under contract. After hearing how much work the houses needed, I advised them to consider whether they’d be able to make any money on those houses after paying for rehab work, interest on their loans, Realtor commissions, and closing costs. They decided to use the inspection contingencies in their contracts and will not be buying those houses.

Use the links below to find real estate clubs in your own area. After you visit, post a comment here and let us know what the meetings in your area are like.

List of clubs at the REIclub Web site

List of clubs at the CREonline Web site

Robert and Angel Elder are the founders of Millionaire Possibilities.

Zillow Map: Homes in the U.S. with Negative Equity

20-30% of the homes in the San Francisco/East Bay area have negative equity, meaning that homeowners owe more on their houses than the houses are worth.

Click below to see a full-size version of the map:

http://zillow.mediaroom.com/file.php/259/NegativeOwnerEquity2007-USA+copy.jpg

There’s a method of selling a house that helps the homeowner get out of a situation. It’s called a short sale and involves negotiating with the bank to sell the house for less than the loan balance.

According to this friendly map, there are lots opportunities for short sales in most parts of the country. We’re currently doing this in the San Fracisco Bay Area as well as Oklahoma City.

Bring me a lead and I’ll pay you $600 if we buy the house.

Facing Default, Some Walk Out on New Homes

The same sorts of loans that drove the real estate boom are now changing the nature of homeownership and foreclosure, giving borrowers incentives to walk away.
http://www.nytimes.com/2008/02/29/us/29walks.html?_r=1&oref=slogin

The bad lending practices of the past few years are now playing out in large numbers of foreclosures. (Thanks to George Chong for bringing this article to my attention.)

If you know anyone in this situation, it’s likely that we can buy that person’s house and keep the foreclosure from happening. We’re working on doing this for someone in California right now. We’ll negotiate with the bank to see if we can buy the house for that 50% discount BEFORE the the house is scheduled to go to the bank auction, preventing the auction from ever happening.

Give me a call sometime. God bless!

Darren
405-501-0676

New Tax Breaks a Relief to Homeowners

http://www.bankrate.com/cnn/news/real-estate/20080110_mortgage_tax_relief_a1.asp?prodtype=mtg

EXCERPT

3 new tax breaks promise to help homeowners:

1. Homeowners who experience a foreclosure, short sale, deed in lieu of foreclosure or loan modification may be able to exclude lender-forgiven mortgage debt from taxable ordinary income.
2. Homeowners may be able to deduct the cost of mortgage insurance.
3. A homeowner whose spouse has died may be allowed up to two years to exclude $500,000 of profit from the sale of a principal residence from capital gains tax.

San Francisco Bay Area Foreclosures by Zip Code (Contra Costa County)

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/10/14/RECONTRA.DTL

Do you still want to live in the San Francisco Bay Area? Bear in mind that this data is four months old. Things are worse now.

Bay Area Foreclosures by Zip Code (Contra Costa County) Jan-Aug 2007

Foreclosures/1000 Homes — Median Sales Price

94509 Antioch 15.3 $379,500.00
94531 Antioch 23.1 $452,500.00

94518 Concord 6.2 $575,000.00
94519 Concord 4.8 $465,000.00
94520 Concord 13.4 $448,000.00
94521 Concord 4.2 $570,000.00

94561 Oakley 12.2 $385,000.00

94565 Pittsburg 11.2 $410,000.00