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Foreclosure pipeline clogging – over 13% of loans delinquent
One in every 7.5 homeowners either fell into delinquency or foreclosure as of November 30, 2009, according to the December mortgage monitor report from Lender Processing Services. The total number of delinquencies reached a record high of 9.97%, a 5.46% increase from the previous month and a 21.29% increase from November 2008. Loans falling into more severe delinquent categories reached 5.01% through November, compared to 1.52% of loans improved toward a current status. That’s compared to November’s mortgage monitor report, when 4.02% of current mortgages through December 2008 fell into delinquency by October 2009. More than 4% of the loans that were current in December 2008, fell behind by 60 days or more, including foreclosure, by the end of November 2009.
It’s the highest rate for that part of the year since LPS began reporting the data. The foreclosure rate in November reached 3.19%, a 1.46% increase from the previous month and an 81.41% increase from November 2008. This doesn’t include the amount of homes falling into the shadow inventory of foreclosure. Some data providers like First American CoreLogic speculate that number could be as high as 1.7 million as the roadblocks of the government incentive programs and moratoriums clog the foreclosure pipeline. “Foreclosure starts continued to decline as a result of loss mitigation efforts like the federal government’s Home Affordable Modification Program (HAMP) and elevated delinquent loan volumes,” according to the report. “The reduction in foreclosure starts, combined with the steady increase in the number of seriously delinquent loans, has resulted in an ever-growing ‘shadow’ inventory of troubled properties.” The states with the most non-current loans were Florida, Nevada and Mississippi. Those with the fewest were North Dakota, South Dakota and Alaska.
Just what we need…more taxes
A senior administration official said yesterday that the White House is considering a tax on financial institutions to ensure that taxpayers who bailed out banks get paid back. The Troubled Asset Relief Program (TARP) dictates that the Office of Management and Budget can take that action five years after TARP went into effect in October 2008 to prevent the federal bailout from adding to the deficit. Robert Gibbs, the White House press secretary, would not discuss how a possible bank fee would fit into Obama’s fiscal year 2011 budget, which is set to be released next month. “There is a significant likelihood that we will not be repaid for the full value of our investments in AIG, GM and Chrysler,” Geithner told an oversight panel. Yet, the financial industry tax under discussion could impact the entire financial industry, a prospect the banking industry opposes. With few details available about any proposed fee, it’s unclear whether banks would be required to pay for losses incurred by GM and Chrysler. “Imposing new taxes on top of the increased regulatory costs will weaken the industry, just when the industry is helping lead the economic recovery,” said Scott Talbott, chief lobbyist for the Financial Services Roundtable, a bank lobbying group. Gibbs said it is the president’s “goal” to ensure the “money that taxpayers put up will be paid back in full.” The trouble, of course, is that soaking “the banks” means soaking you too, since taxes are almost always passed on to the consumer.
Smaller drop in home equity
A new report from Trulia.com finds that of all homes on the market today, 21% have seen at least one price reduction. But that’s the second straight month that the%age has declined. Total home equity declines dropped 14%, from $24.7 billion in December to $21.2 billion in January. The South continues to improve the most with 20% of homes seeing price reductions. All other regions stand at 22%. Los Angeles, CA and New York City are seeing the biggest improvements in the number of sellers reducing prices, but the luxury market is still being hit hardest. The average price discount on a luxury home (those listed at $2 million and above) is 15%, the highest since Trulia began tracking price cuts in April, 2009. The average price discount on homes under $2 million is 10%. While luxury homes make up just 2% of the total listings currently, they maker up 24% of the total dollar value of price reductions. While the numbers look promising now, recent data showing a slowdown in sales and rising foreclosures could put additional pressure on home prices. Government stimulus in housing in the form of the tax credit and lower mortgage interest rates will phase out by Spring, and some experts believe a double dip in home prices is a real possibility.
Small business sentiment down
The sentiment of U.S. small business owners stalled in December, hurt by weak sales and worries about government policies, according to a survey released on Tuesday. The National Federation of Independent Business said its small business optimism index fell for the second straight month, dropping 0.3 point to 88.0 in December. “Continued weak sales and threatening domestic policies from Washington have left small business owners with little to be optimistic about in the coming year,” said the federation’s chief economist, William Dunkelberg, in a statement. Small business owners are not in a hiring mood because customers are not in a spending mood, the group said. Owners continued to liquidate inventories and weak sales trends gave them little reason to order new stocks. Plans to make capital expenditures over the next few months rose 2%age points to 18%, but was still only 2 points above the 35-year record low, the group said. “Capital spending is on the sidelines,” said Dunkelberg. “Spending on capital projects remained at historic low levels, as did the demand for credit to finance such projects.” Of the owners surveyed, only 7% characterized the current period as a good time to expand facilities, down 1 point from November. The group said 92% of the owners surveyed either obtained the credit they wanted or were not interested in borrowing.
CMBS delinquencies up 5 times over a year ago
According to credit-rating agency Fitch Ratings, an increase in defaults across property types pushed total commercial mortgage-backed securities (CMBS) delinquencies 42 basis points higher, closing 2009 at 4.71% delinquent. The rate of growth in delinquent CMBS looks set to continue in coming years, with a potential peak at 12% in 2012. “Though delinquencies have increased approximately five times from a year ago, they may not peak until 2012,” said Fitch managing director Mary MacNeill. “An increased amount of loans are coming due over the next two years that will result in delinquencies possibly peaking at 12%.” Property types rose across the board since December 2008, from delinquent multifamily growing by 196%, to delinquent hotel swelling by 1,175%.
Multifamily properties reached 7.54% delinquent in December 2009. The dollar volume of multifamily delinquencies is $5 billion, from $1.6 billion in December 2008. Hotel properties mark the largest single category in terms of percent delinquent – 9.13% or $4.6 billion – while retail properties claim the highest dollar amount delinquent – $5.7 billion or 4.25%. Office properties squeak by Industrial as the lowest delinquency rate – 2.66% or $3.9 billion – while industrial properties claim the lowest dollar amount delinquent – $851.3 million or 3.57%. Not only are the occurrence of delinquent loans growing within CMBS, but the delinquent loans are increasing in size. There are now 25 delinquent CMBS loans greater than $100m, compared with four in December 2008. The four most recent vintages grew to more than 75% of the total delinquencies by balance, from just under half one year earlier.
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Time Impact on ROI
Yesterday we discussed the impact of price on ROI so today it is only natural to mention the impact of time. Price and time provide the cornerstone of ROI valuation for most real estate especially when leveraged funds are utilized. Just as total price tends to become less of an imperative when purchasing a property using leverage, the length of the loan is also able to dramatically change the ROI/NOI equation. Let’s use a few realistic examples to demonstrate.
Suppose for just a second that you purchased a short sale property for $90,000 with an anticipated return on initial investment of $9,000 – a total of 10%. Not a bad rate of return by any means but nothing to get overly excited about. As we all know, inflation and the opportunity cost of doing business may or may not make this an attractive investment compared to other alternatives. So, how can you determine whether or not this is the best use of your hard earned money over a given period of time? Remember, time is one of the most important considerations to keep in mind when determining the true profit potential or value of any investment.
One way to measure the impact of time on ROI is to realize that many different types of investments are able to produce exactly the same return depending upon the initial interest rate combined with time. For example:
$180,000 invested at 5% for one year can generate $9,000 but so can a $60,000 investment that pays 15% interest. Of course, everyone wants the highest possible rate of return without the risk but eliminating risk isn’t always possible. However, it is possible to reduce risk – substantially. The most simple method is to calculate the NOI or net operating income in order to assure the property is able to generate enough income or profit to pay for itself.
Using the prior example of a short sale property with a purchase price of $90,000, payments would be roughly $750 per month. Now it is a matter of covering the cost of the monthly mortgage by selecting the time/value sequence of money generated by the NOI. Think of it as the “spread” between time/interest of the property value. A 3% to 5% interest rate at 15 years would allow you to still pay the original $750 mortgage or a 7%-8% interest rate could be covered with a 20 to 25 year mortgage. By adjusting the length of the loan and interest rate, it is often possible to pay the sellers a higher asking price while still coming out ahead.
Bottom line – use the time/money value when negotiating price for a given property. Combined with the use of leverage, it’s one more method savvy short sale investors use to maximize ROI while simultaneously decreasing risk.
See you at the top!
Chris McLaughlin
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Copyright Loss Mitigation Institute LLC 2009.
All Rights Reserved.
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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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