Real Estate News & Commentary by Chris McLaughlin, May 26, 2009
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Foreclosures are on the rise this year
As the unemployment rate threatens get into double digits from the current rate of about 9%, analysts expect foreclosures to go up significantly in future. The new wave of foreclosures will include not only sub-prime borrowers, but also borrowers who were once financially healthy but are falling into bad times as a result of job loss. Mark Zandi, chief economist at Economy.com, a provider of economic analysis, has said that “loss of jobs and loss of overtime hours and being forced from a full-time to part-time job is resulting in defaults. They’re coast to coast.”
According to Economy.com, unemployment will account for 60% of mortgage defaults this year. The Obama administration announced a $75 billion incentive program for mortgage companies that reduce payments for troubled homeowners, in February. The program was estimated to help at least 4 million homeowners facing foreclosure. With the employment situation not showing any signs of improvement, experts are now wondering how effective the plan will be. Alan Ruskin, chief international strategist at RBS Greenwich Capital says he doesn’t “think there’s any chance of government measures making more than a small dent.”
Home price decline to continue
Home prices continue to decline on account of record foreclosures, tighter lending standards, and a significant supply of unsold properties. According to Standard & Poor’s/Case-Shiller Home Price Indices released today, home prices in the U.S. fell by 18.7% in March from a year earlier. On a month-over-month basis, home prices, as measured by an index of 20 metropolitan cities, fell 2.2% in March from February. David M. Blitzer, chairman of the Index Committee at Standard & Poor’s, said, “Declines in residential real estate continued at a steady pace into March.” Over the past 3 months, the index has declined at an annual rate of 25%. According to Adam York, an economist at Wachovia, “Home price declines will likely continue into 2010, considering the weakness in both the housing market and the broader economy, but hopefully the pace of decline will moderate over the next few quarters.”
FDIC announces a one-time fee to strengthen its finances
With the increase in bank failures, the deposit insurance fund of the Federal Deposit Insurance Corporation (FDIC) has been taking a hit. FDIC has announced that it will be charging banks a one-time fee this year, in order to replenish its insurance fund. The charge will be calculated on the basis of a bank’s asset size minus its Tier 1 capital. John Dugan, the Comptroller of the Currency, voted against the proposal and called it “perverse.” Dugan argued that the deposit insurance fund has been largely drained by the failure of smaller banks and it would not be correct to penalize larger banks by imposing a charge on the basis of their asset size. Sheila Bair, the Chairman of FDIC, has defended the fee. “A lot of large banks haven’t failed because of massive government assistance,” said Bair. “If it weren’t for those, some big banks would have failed and there would have been costs.” The special fee, which will bring in $5.6 billion, will serve FDIC well. The expected loss for FDIC’s insurance fund is estimated to be $70 billion over the next 5 years.
Dead banks walking
A large majority of the 8000 odd small banks in the U.S. are still functional. The question is how healthy they actually are. With non-performing assets (bad loans) at over 10% of the total assets in many of the banks, one wonders if such banks are actually dead banks posing as living ones. The Federal Deposit Insurance Corporation (FDIC) will be publishing a report in which it will provide an assessment of the banking industry, next week. The report is expected to throw some light on the problem. As of 2008, the number of “problem” banks, published by FDIC, stood at 252. The number is expected to be higher in 2009. Experts believe FDIC should have been lot more proactive in closing down troubled banks. Recent reports published by the Office of Inspector General attached to FDIC have charged that FDIC was “not timely and effective” in addressing problems affecting some of the banks that failed last year. FDIC has initiated a number of steps to strengthen its internal mechanisms to tackle the banking crisis. However, the job of FDIC is not likely to get any easier in the months to come, given the dwindling interest of buyers in the assets of failed banks.
Accounting sleight of hand?
When banks acquire troubled assets, the bad loans acquired seem to become income. Bizarre as it may sound, banks, by using the so-called “accretable yield” concept, can book revenues after they acquire bad debts. Accretable yield refers to the difference between the value of the loans on the banks’ balance sheets and the cash flow they are expected to produce. The practice is what is commonly called Purchase Accounting. JPMorgan bought Washington Mutual for $1.9 billion last September, and by using purchase accounting, it marked down $118.2 billion of assets by 25 percent. As borrowers repay their debts, the bank expects to make $29.1 billion in pretax income, over the life of the loans. “One of the beauties of purchase accounting is after you mark down your assets, you accrete them back in,” says Gerard Cassidy, an analyst at RBC Capital Markets. “Those transactions should be favorable over the long run.” Some analysts are worried about banks stretching purchase accounting to smooth out earnings. Chris Armbruster, an analyst at Al Frank Asset Management Inc., says, “There’s definitely going to be some marks that were taken that were too extreme.”
Now on to our real estate investor education tips section …
Squatters versus Short Sales
Squatters. They are appearing everywhere. No longer banished to abandoned homes, squatters are organizing in order to move into recently foreclosed and vacant properties in newly built neighborhoods all over America. In fact, community action groups like ACORN and others are stepping in to help – in part to provide homes for the homeless but also to help stabilize neighborhoods from becoming accosted by an influx of drug users and others that could ravage property values. Rather than allow just anyone to move into foreclosed homes, this new breed of community organization at least attempts to screen would be “neighbors” before placing them into homes.
Still, there are many unanswered questions; who is responsible for maintenance and upkeep of the homes? What liability does the lender or owner have if a squatter (or their family member) is hurt while on the property? Will insurance coverage step in should a fire or other damages take place in what is supposedly an unoccupied dwelling? These are other important questions are growing concerns for lenders, current homeowners and potential short sale investors….and given the rapid escalation of squatters plus organized movements to place people into un-occupied homes, it’s a problem likely to impact police as well as other homeowners in the neighborhood.
Short sale investors should learn how their state and local authorities are dealing with squatters – although some will treat it as a trespass violation and remove unauthorized persons, many areas actually require the current owner to file for eviction in order to remove a squatter. This means real estate agents and investors must take a proactive approach when purchasing a home with existing squatters in place…or make sure to take steps to prevent access.
One of the easiest methods to help prevent squatters from taking possession of a property and having to file for eviction is to simply transfer utilities into your own name or the name of your business/trusted organization. This is an important step because one of the most common ways squatters gain control of a property is by turning on the utilities. Most utility companies require little more than a security deposit in order to begin service and once they are in- squatters can be tough to get out.
However, not all squatters even bother with utilities; in fact, the worse the squatter situation the more likely there will not be any utilities installed. It doesn’t take a lot of imagination to understand why squatters are becoming banks biggest nightmare; rather than fear this, savvy short sale investors should use it to their advantage. Inform banks, neighbors and others dealing with high vacancy areas about the risk involved in allowing squatters into an area. Instead of dealing with the liability, maintenance and other issues, they can simply settle with a short sale instead. Especially with banks trying to sit on their non-performing assets, vacant homes are increasingly becoming more than a mere eyesore – squatters are moving in before real estate agents or other bank agents have performed a property inspection to place it on the market. Rather than fight it, let it work for you when submitting your next short sale offer….accept or run the risk of squatters moving in. Hmmmm…seems like a no-brainer especially with the latest incentives by the federal government to encourage lenders to accept short sale offers or other foreclosure alternatives.
See you at the top!
Chris McLaughlin
http://www.shortsalesrichesturbocharged.com
PS:
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Copyright Loss Mitigation Institute 2009.
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner and Supervising Broker of one of Florida’s
largest Real Estate firms, running 4 different
offices, supporting nearly 450 agents, uniquely
positioning him to help thousands of investors
make money in the biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
seminar leader for current trends and hot topics
in Real Estate Investing, Entrepreneurship, and
Wealth Building
* On twitter: http://twitter.com/mclaughlinchris
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