Real Estate News & Commentary by Chris McLaughlin, December 8, 2009

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MBA – 3Q09 Commercial and Multifamily Mortgage Performance Falls

According to the Mortgage Bankers Association’s (MBA)

Commercial/Multifamily Delinquency Report, delinquency rates for most commercial/multifamily mortgage investor groups continued to increase in the third quarter. Commercial and multifamily mortgages continued to feel stress in the face of the weakened economy,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “The deterioration in commercial and multifamily loan performance is generally in line with what is being seen in other parts of the economy, with loans backed by commercial properties continuing to perform far better than construction and development loans.” Between the second and third quarters, the 30+ day delinquency rate on loans held in commercial mortgage-backed securities (CMBS) rose 0.17 percentage points to 4.06 percent.

The 60+ day delinquency rate on loans held in life company portfolios rose 0.08 percentage points to 0.23 percent. The 60+ day delinquency rate on multifamily loans held or insured by Fannie Mae rose 0.11 percentage points to 0.62 percent. The 90+ day delinquency rate on multifamily loans held or insured by Freddie Mac remained unchanged at 0.11 percent. The 90+day delinquency rate on loans held by FDIC-insured banks and thrifts rose 0.51 percentage points to 3.43 percent. Based on the unpaid principal balance of loans (UPB), delinquency rates for each group at the end of the third quarter were as follows: CMBS: 4.06 percent (30+ days delinquent or in REO); Life company portfolios: 0.23 percent (60+days delinquent); Fannie Mae: 0.62 percent (60 or more days delinquent); Freddie Mac: 0.11 percent (90 or more days delinquent); Banks and thrifts: 3.43 percent (90 or more days delinquent or in non-accrual). Construction and development loans are not included in the numbers presented here.

Stop Spending, Washington

Several groups of citizens and experts across the country, part of the Concord Coalition’s Fiscal Stewardship Project, delivered a report to their lawmakers on Capitol Hill detailing their suggestions for how best to address the long-term fiscal storm facing the United States if lawmakers do nothing. To solve the country’s fiscal problems, the gross domestic product would need to increase by double digits on average for the next 75 years, on an inflation-adjusted basis, according to estimates from the Government Accountability Office, lawmakers are left with three unpopular choices: cut spending, raise taxes, or stop making promises the country can’t afford. Here are a few of the concrete suggestions made by one or more of the councils: Shore up Social Security’s long-term shortfalls: The range of suggestions included raising the retirement age, applying means testing to benefits, raising more revenue and ensuring by a “date certain” that projected revenue is sufficient to cover projected expenses; Simplify the tax code: The aim should be to reduce taxpayer aggravation, increase voluntary compliance and reduce enforcement costs; Raise taxes when necessary: The Atlanta council suggested a combination of an income tax and a federal consumption tax.

The Northern California council recommended that the additional tax burden “be spread in a way that ensures everyone will contribute at least something in return for the government services they receive”; Make everyone curb growth in health spending: That includes the government, medical providers, insurance companies, lawyers and consumers; Form a bipartisan fiscal commission: The goal is to have a commission willing to make tough recommendations about how to address long-term budgetary shortfalls and put those recommendations up for a yes-or-down vote in Congress; Think long-term: Lawmakers should consider the costs and effects of a bill beyond the 10-year window they usually use. And they should think about the consequences of their actions on younger generations; The Atlanta council put it this way: “If Americans don’t make the hard decisions now, it will have a devastating impact on the quality of life for our children a and grandchildren.”

Interest rates to stay low

Fed Chairman Ben Bernanke says the Federal Reserve is still looking at an “extended period” for low interest rates because the economic recovery remains tentative and inflation continues to be stable. “Right now we are still looking at the extended period, given that conditions remain, low rate utilization…and stable inflation expectations, that remains where we are now,” Bernanke said in response to a question at the Economic Club of Washington. “We continue to look at the economy, obviously there have been signs of strength recently.”

As is becoming a habit in Washington these days, he tagged on this: “We still have some way to go before we can be assured that the recovery will be self sustaining.” The Fed chief repeated his belief that the recovery will continue at least into next year. But he cautioned that the economy is confronting some “formidable headwinds” — including a weak job market, cautious consumers and still-tight credit. Those forces “seem likely to keep the pace of expansion moderate,” he said. Under one Fed forecast released last month, the jobless rate would remain stubbornly high next year — ranging from 9.3 to 9.7 percent. The Fed has warned that it could take five or six years for the job market to return to normal.

BOA – 2/3s of HAMP borrowers will lose homes

Mr. Schakett, Credit loss mitigation strategies executive at Bank of America (BOA) says that of the 65 thousand trial modifications set to expire Dec. 31st with (BOA), a full two thirds of the borrowers, while current on their payments, have not submitted the full documentation required to turn a trial mod permanent under the HAMP guidelines. “We don’t really know the major reason why the customers are not returning the documentation,” Schakett claims. Diana Olick says: “Well I can tell you why (and I’m sure he knows this too). The trial modification process only requires oral verification of income to begin, but to go permanent, you need to prove your income, submit your tax returns, and basically come clean with all your finances. I’m guessing a lot of folks who took out their initial loans with false or non-existent documentation aren’t eager to let the government know that.” Schakett says that Treasury is now considering upping the ante on the trial modifications, requiring much more documentation up front, so that banks won’t have all these trial mods going with borrowers who inevitably won’t reach permanent modification status. As Olick says: “…I get a lot of email from borrowers, telling me that the banks are holding up their paperwork, losing faxes, messing up modifications and leaving those borrowers in the lurch. I don’t dispute that, but I can’t fully dismiss the banks when they tell me that 2/3 of the borrowers won’t submit the paperwork. I also happen to know that a huge percentage of borrowers being offered modifications are rejecting them. They don’t want to pay. Many are already gone.”

Jobs outlook getting worse?

According to Mike “Mish” Shedlock, author of Mish’s Global Economic Trend Analysis and an investment advisor at SitkaPacific Capital Management, the November jobs report that got everyone excited was an “outlier” and “almost looked fabricated.” Looking beyond the November jobs data, Shedlock says the odds of the unemployment rate coming down anytime soon are remote. Even based on generous assumptions of 150,000 new jobs per month, no double-dip recession and a declining participation rate as Baby Boomers retire, “the best I can do is suggest the unemployment rate will be over 10% all the way through 2015 and never dip below 8% all the way out through the end of 2020,” Mish says. “In the absence of a war outbreak in the Middle East or Pakistan — and/or Congress going completely insane with more stimulus efforts — I think oil prices are likely to drop, the dollar will strengthen or at least hold its own, and the best opportunities are likely to be on the short side,” he writes. “2010 is highly likely to retrace most if not all of the ‘reflation’ efforts of 2009. If things play out as I suspect, 2010 will be the year of the great retrace as the economic recovery disappoints.”

Now on to our real estate investing educational arena …

How to Pick the Perfect Loan

A lot has been written about interest rates and credit scores but few people focus on how to pick the perfect loan. While it might not sound like the most exciting part of purchasing a short sale property, it is one of the most important decisions you are likely to make. As millions of Americans have already learned, obtaining the wrong loan can be a very costly decision. Fortunately, it’s relatively simple to secure a great loan that works well for your individual situation once you are aware of all your options. Follow these quick steps to help find your perfect loan:

1. Determine your down payment. The larger your down payment the more options you will have available but always leave a little additional cash for emergencies and other needs.

0-5 Percent Down Payment: VA loans for veterans or Vendee loans for foreclosures.
3.5 – 5 Percent Down: FHA or HUD loan for purchase of primary residence only.
5 to 10 Percent Down: Conventional Loan with strong credit score.
20 Percent Down: Conventional Loan without PMI or inferior credit score.
20 to 30 Percent Down: Investment loans, vacation or second homes.

2. Determine the term. Right now fixed rate loans are at or near historic lows so if you intend to hold the property for any length of time, it’s a good idea to take a serious look at 15 to 30 year terms. Interest only and ARM (Adjustable Rate Mortgages) remain a solid investment for those who understand the pros and cons.

30 Year Term: Select a 30 year term if you intend to remain in the property for many years, plan to turn it into a rental property at a later date, are on a limited fixed income or are expecting to be on a fixed income in the future and want minimum payments with maximum flexibility. Remember, you can always pay more on the loan should you desire.
15 Year Term: Select a 15 year term if you want to obtain the lowest possible interest rate with steady fixed payments, become debt-free as soon as possible, save tens of thousands of dollars over the life of the loan and you have ample yet steady income.
Interest Only: Select an interest only loan if you want to lock in a great price on a property, want to get started in real estate investments with a modest amount out of pocket, expect to have dramatically higher income within a few years (for example, you are in college, paying off significant debt or will have a spouse/other return to work) or are buying in an area experiencing rapid appreciation.
ARM/Option ARM’s: Select an adjustable rate mortgage if you plan to use the property for cash flow then sell, need the minimum payment for a short period of time then expect to have significantly more cash in the future and/or wish to use an alternative to a Jumbo Loan.

See you at the top!

Chris McLaughlin
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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 of one of Florida’s largest Real Estate firms,
     running 4 different offices, supporting over
     400 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
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