Real Estate News & Commentary by Chris McLaughlin, August 27, 2009

http://www.shortsalesriches.com

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Coming soon to a bank near you…negative interest rates?

We’ve all heard about how the banks won’t lend the money the Fed keeps giving them.  If the banks don’t lend, the economy won’t recover, and the Fed will have trouble generating the inflation needed to lessen the burden of our debt binge.  We’re not the only country with that problem, of course, and last month Sweden introduced a new way to get its banks to lend:  negative interest rates.  Swedish Riksbank entered uncharted territory when it became the world’s first central bank to introduce negative interest rates on bank deposits. In effect, it is a fine on banks that refuse to lend, since the banks are holding money that actually declines every day it sits in their vaults.  If banks are actually penalized for holding money, they have to lend it, right?  Maybe.  Or they might just charge higher interest rates on loans, or throw in the towel and go broke.  Whatever happens, other countries are watching very closely, and if it works as intended, who knows?  At this stage, the US seems unlikely to introduce the policy, since there have been no hints from policymakers about it being an option.  But things change…especially with this administration.

Mid-year ranking of commercial and multifamily mortgage servicers

The Mortgage Bankers Association (MBA) released its mid-year ranking of commercial and multifamily mortgage servicers as of June 30, 2009, and Wells Fargo/Wachovia Bank tops the list with $476.2 billion in U.S. master and primary servicing.  It is followed by PNC Real Estate/Midland Loan Services with $308.5 billion, Capmark Finance Inc. with $248.7 billion, KeyBank Real Estate Capital with $133.1 billion, Bank of America with $132.2 billion, and GEMSA Loan Services LP with $104.8 billion.  Specific breakouts in the report include:

• Total U.S. Master and Primary Servicing Volume
• U.S. Commercial Mortgage-backed Securities (CMBS), Collateralized Debt Obligations (CDOs) and Other Asset-Backed Securities (ABS) Master and Primary Servicing Volume
• U.S. Commercial Banks and Savings Institution Volume
• U.S. Credit Company, Pension Funds, REITs, and Investment Funds Volume
• Fannie Mae and Freddie Mac Servicing Volume
• Federal Housing Administration (FHA) Servicing Volume
• U.S. Life Company Servicing Volume
• U.S. Warehouse Volume
• U.S. Other Investor Volume
• U.S. CMBS Named Special Servicing Volume
• Total Non-U.S. Master and Primary Servicing Volume

Option ARMs defaults are the next kick in the shins

Since February, default and foreclosure rates on option ARMs have passed those of subprime mortgages, according to the research firm, First American CoreLogic.  Option ARMs, which accounted for $750 billion in mortgages made from 2004 to 2007, remain a risk because many are not eligible for refinancing.  About a third are already in default, according to analysts.  Compared with subprime loans, option ARMs are fewer but tend to have larger balances, and resets on option ARMs in recent years have often doubled the payments.  “Everyone’s been focused on subprime, but we’re more concerned about this,” said Todd Jadlos, managing director of LPS Applied Analytics, which analyzes data for the financial industry.  “By the time subprime defaults had increased 200 percent, in June and July of 2007, option ARMs had gone up 400 percent.  People just didn’t notice because the overall numbers weren’t as high.”  First American CoreLogic anticipates 600,000 option ARMS will reset within four years, and Diana Olick of CNBC calls it even higher, at over a million resetting ARMs over the next four years.

Bank stocks due for a pummeling?

Trillions of dollars were pumped into the financial system everywhere in the world, so the rally over the past few months is not surprising, but is it about to come to an end?  “The financials have been held up by little more than vapor over the past weeks,” said Christian Thwaites, president and CEO of Sentinel Asset Management.  “I agree that the market is overstretched here,” Lou Brien, market strategist with DRW Trading, also said.  “We’ve done what we have done in the past and really nothing more.”  In fact, some analysts are expecting more than just a drop in share prices.  John Kanas, whose private equity firm bought BankUnited of Florida in May, says 1000 banks will fail over the next 2 years.  “We’ve already lost 81 this year.  The numbers are climbing every day.  Many of these institutions nobody’s ever heard of.  They’re smaller companies.  Government money has propped up the very large institutions as a result of the stimulus package,” he said.  “There’s really very little lifeline available for the small institutions that are suffering.”

Wall Street Journal on Charlie Rangel:  Can you say “scorched”?

“…When you’re a powerful Congressman and working diligently to increase tax rates to pay for President Obama’s health-care plan, we suppose it’s easy to lose track of one of your checking accounts. That would be the one at the federal credit union with a balance somewhere between $250,001 and maybe as high as $500,000. And when you’re crunched for time and pulling together bills to pass in a rush, we guess, too, that you might overlook several other investment accounts, even if some of them are sizable, such as the ones Mr. Rangel missed at JP Morgan, Merrill Lynch, Oppenheimer and BlackRock.  Oh, and those vacant properties in Glassboro, in southern Jersey? Everybody in Manhattan tries not to think much about New Jersey, so those lots and their as-much-as-$15,000 value must also have slipped down the memory hole. (The New York Post The Chairman probably isn’t doing a lot of dining at KFC, Pizza Hut, Taco Bell or Long John Silver’s, either, which may explain why he didn’t disclose the $1,001 to $15,000 in stock he owns in Yum Brands, the conglomerate that runs those chain restaurants. Compared to his undisclosed portfolio stake in PepsiCo—$15,001 to $50,000—that’s practically a rounding error…”

Now on to our real estate education section …

Dealing with Junior Liens & Second Mortgages

One of the major myths surrounding short sales is that a property with a junior lien or second mortgage is simply off-limits. While many investors or agents that deal in large numbers of short sale properties may move beyond the headache and hassle associated with junior liens and second mortgages, they represent prime purchasing opportunities for those with more time than money on their hands.

Learn how to generate major profit potentials and avoid common pitfalls by recognizing the major motivations required to address junior liens and second mortgages.

Fact #1 – Junior liens and second mortgages often get wiped out entirely during an estate auction, bankruptcy or other related actions. This is a critical issue to keep in mind when approaching a lender that holds a junior lien or second mortgage on a potential short sale property. While the primary mortgage holder or lender will understandably desire to recuperate as much of the original mortgage as possible, they have the upper hand by essentially controlling the underlying asset. Should the property go to bid, the lender is first in line for satisfaction. All other junior lien holders must hope and pray there is enough left over to cover their loan. As you might suspect, lower sales prices often leave junior lien holders with nothing….and more open to negotiation for low pay-offs than you might suspect.  It’s not uncommon to offer a fraction of the cost of the original note in order to secure a timely acceptance letter.

Fact #2 – It’s often worth a little to gain a lot. While it is entirely possible to have a junior lien totally wiped clean, it’s often worth the time and effort to offer a $1,000 or some other reasonable amount (depending upon the total cost of the lien) in order to secure a timely acceptance and negotiation.

Fact #3 – Other alternatives exist! A second mortgage or lien holder that refuses to negotiate a low pay-off might be willing to remove the lien from the property and attach it to the homeowners name as an unsecured note. This should be clearly explained to the seller since it will result in a debt even after the home has sold. However, sellers with relatively reasonable second mortgages as well as those that desire to minimize debt in order to restructure may find this a highly agreeable option. If worst comes to worst, the seller is now left with an unsecured debt which is subject to  normal bankruptcy laws.

Fact #4 – One offer isn’t always enough. Don’t be afraid to counter-offer or reduce your initial offer as new information come in. It may delay the process and isn’t always desirable but as the date draws closer or other information becomes apparent, junior liens are at increased risk for walking away with absolutely nothing. Don’t be surprised to find they are willing to accept an offer originally rejected just a few weeks before.

Fact #5 – Second mortgages are not easy to deal with but they are “do-able”…third and fourth mortgages are often downright simple. Remember, the lower they are on the totem pole the less likely they are to see anything from the property. Make this clear and present your case effectively in order to save time and money. Many will settle for little to nothing (literally) if you understand how to effectively present your case and the calculations. Not sure where to start? Sign-up for more information or sit in on one of the video seminars to learn how you can start profiting from short sale properties.

See you at the top!
Chris McLaughlin

http://www.shortsalesriches.com

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