Real Estate News & Commentary by Chris McLaughlin, January 13, 2010

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Option ARMs feeding foreclosures

There are no specific numbers on how many option ARM loans there are. But analysts estimate that as many as 1.3 million borrowers took out $389 billion in option ARMs in 2004 and 2005 alone. Many of those option ARM loans have already re-adjusted to higher payments, but more are on the way. Some 88 percent of Option ARMs originated between 2004 and 2007 are going to adjust higher between now and 2012. Those option ARM borrowers could see their housing bills go up as much as 63 percent, according to Fitch ratings. “It’s going to kill off housing,” warns Patrick Pulatie, CEO of Loan Fraud Investigations, a predatory lending audit firm. “We have pretty close to 500,000 option ARM payments going higher in California over the next couple of years. The impact of the higher payments will be devastating for homeowners who are having trouble now making ends meet.”

As the terms of those mortgages now readjust, homeowners are facing much higher mortgage payments at a time when the value of their house has plummeted and many are out of work. In some cases, homeowners who chose a very low starting interest rate have actually seen the overall amount of their mortgage increase—known as negative amoritization—putting them even deeper in debt. “Option ARMs have been a disaster from day one and a lot of them have already defaulted,” says Greg McBride, senior financial analyst with Bankrate.com. “This is a very big issue because interest rates are rising.

And there’s more misery. If the Fed increases rates in the months ahead to fight inflation, rates tied to option ARM indexes will rise further—causing more payments to adjust up even sooner. And while Option ARM borrowers might want to re-finance, they often can’t because of falling home values and tighter credit restrictions. “I don’t see how the option ARM problem is not a huge issue,” says Sylvia Alayon, vice president and director of operations for the Consumer Mortgage Audit Center, which provides auditing services to advocacy groups. “This is a major hit for housing. It will continue to feed the excess supply of housing with more foreclosures.”

What caused the housing bubble?

In a monthly survey of business economists by the Wall Street Journal, 42 said low interest rates were partly to blame for the housing boom while 12 sided with Mr. Bernanke, who said they weren’t. Academic economists who specialize in monetary policy were split in a separate survey: 13 said low interest rates helped cause the housing bubble; 14 said they didn’t. Mr. Bernanke laid out his defense of Fed policy in a speech to the American Economic Association last week, acknowledging that interest rates were very low but adding that policy “does not appear to have been inappropriate.” Other factors — notably an explosion of exotic mortgages and a flood of cash coming into the U.S. from abroad — were the crucial drivers of the housing bubble, he said. “Regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices,” he said. The “basic problem” was “the mistake” of raising short-term interest rates too slowly from 2004 through 2006, said Miles Kimball of the University of Michigan. “Going up quicker would have been better.” “The appreciation of house prices was but one of many indicators which called for a somewhat more restrictive interest-rate policy” in 2004 and 2005, said Marvin Goodfriend of Carnegie Mellon’s Tepper School of Business. Many economists met Mr. Bernanke halfway — arguing that low rates played a role in fueling the housing boom, though they may not have been the key force. Some noted that low rates encouraged banks to write the riskier loans that Mr. Bernanke puts at the center of the crisis. “There is plenty of blame to go all around,” said Martin Eichenbaum of Northwestern University, expressing a commonly expressed view. “Loose monetary policy certainly contributed to easy financing, which was one element of the bubble.”

DSNews.com – Short sales are the answer

The Obama administration continues to search for a solution for homeowners facing foreclosure, but the reality of the situation is only about 4 percent of these at-risk homeowners receive long-term mortgage help. Nearly 2 million housing units in the United States are in foreclosure or are bank-owned, and more are expected to follow, RealtyTrac said. Citigroup experts say the government’s current solutions have been ineffective at keeping people in their homes, and they anticipate lenders could foreclose on another 8 million loans as the economy worsens. According to the National Association of Realtors, almost 500,000 transactions in 2009 were short sales, representing almost 10 percent of all home sales. Banks are beginning to go along with short sales in increasing numbers, Bloomberg.com says.

According to the article, short sales almost tripled to 40,000 in the first six months of 2009, compared to the same months in 2008. However, according to data from the Office of Thrift Supervision and the Office of the Comptroller of the Currency, in the first half of 2009 there were 25 foreclosures started or completed for each short sale transaction. “It’s really finally dawning on banks that they’re better off with a short sale,” said Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles. “I think banks were in denial.” The Obama administration is also advocating short sales as an alternative to foreclosure. As DSNews.com reported, the Treasury Department recently laid out finalized guidelines for carrying out short sales under the Making Homes Affordable program. Under the Home Affordable Foreclosure Alternative (HAFA) program, the administration is urging participating servicers to follow through with short sales as an alternative to foreclosure for homeowners who do not qualify for a modification under the Home Affordable Modification Program (HAMP).

Bank revenue slumping?

Analysts at J.P. Morgan and Morgan Stanley issued reports on the banking industry yesterday in which they estimated that investment banking revenues had suffered in the final three months of last year. J.P. Morgan’s report forecasts an average 27% decline in fourth quarter fixed-income revenues, with some banks such as BNP Paribas, Credit Suisse AG and Goldman Sachs Group Inc. expected to report a more than 30% fall in earnings from their fixed-income divisions for the period. The fall is blamed on a continued drop in market volatility, which has reduced the profitability of credit and rates trading businesses that had been benefiting from record high bid/offer spreads earlier in the year.

Equity revenues are also forecast to decrease for similar reasons, with the report predicting an average 11% fall in earnings from the business. Morgan Stanley’s analysts expect leading banks, such as Bank of America Merrill Lynch, Citigroup and J.P. Morgan to report a drop of between 22% and 41% in trading revenues from fixed income, currencies and commodities, with overall trading revenues forecast to fall by as much as a quarter. The report comes on the heels of news that Obama may raise taxes on ALL banks, regardless of whether they received funds from TARP. “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. The federal bailout program has always been a controversial topic, but news of executive bonuses now being awarded is throwing new fuel on populist anger.

Home Refinancing Demand up

U.S. mortgage applications rose during the first week of 2010, reflecting a surge in demand for home refinancing loans as interest rates dropped, data from an industry group showed on Wednesday. Demand for loans to purchase a home, however, only rose marginally. A continuation of this trend would not bode well for the U.S. housing market, which has been showing signs of stabilization, but remains highly vulnerable to setbacks. The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended January 8 increased 14.3% to 528.1. The index, however, pales in comparison to its year-earlier level of 1,324.8. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was down 6.4 percent. The lowest mortgage rates in decades and high affordability helped the hard-hit U.S. housing market find some footing in 2009 after a three-year slump. The MBA’s seasonally adjusted purchase index, a tentative early indicator of home sales, rose 0.8% to 213.7. The seasonally adjusted index of refinancing applications increased 21.8% to 2,407.2. The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.13 percent, down 0.05 percentage point from the previous week. The prior week’s rate was the highest rate since late August.

Interest rates, however, were above the year-ago level of 4.89% and an all-time low of 4.61% set in the week ended March 27, 2009. The survey has been conducted weekly since 1990. The refinance share of mortgage activity increased to 71.5% of total applications from 68.2% the previous week. The adjustable-rate mortgage, or ARM, share of activity was unchanged at 4.0% from the previous week. Cameron Findlay, chief economist at LendingTree.com in Charlotte, North Carolina, said mortgage rates should rise sharply this year, reaching 6.20% in the fourth quarter. The mortgage finance industry will likely see a continued slow-down in 2010 as unemployment remains high and home sales slide, the MBA says.

More magic job numbers

In the continuing saga of jobs “saved or created,” the president’s chief economic adviser now claims the economic stimulus program has boosted employment by 1.5 to 2 million jobs. The Obama administration estimate includes both jobs directly funded by stimulus money, as well as those created indirectly by companies buying supplies for stimulus projects, people spending their stimulus tax cuts and the like. The administration last month changed the methodology used to track stimulus jobs to cover all positions funded by stimulus money, not just those “created” or “saved.” It will also only report figures on a quarterly basis and not attempt to keep a running total.

How one arrives at concrete numbers like these when all indications are that most people paid down debt with handouts is left unsaid. The Romer report, by the Council of Economic Advisers, (named after Christina Romer, chair of the council) is likely to spark sharp reactions from the Obama administration’s critics who argue that the $787 billion package has failed to deliver on its promises. The economy has continued to lose jobs despite stimulus – shedding 85,000 in December. The administration, however, maintains that things would have been much worse without the American Recovery and Reinvestment Act. The Romer report comes as the administration pushes a second stimulus bill in hopes of boosting employment. The Jobs for Main Street legislation calls for spending $154 billion on highway and transit construction and on education to prevent states from laying off teachers. The bill would also extend the deadline to file for unemployment insurance and the Cobra health insurance subsidy until the end of June. No doubt we’ll all have a good laugh in the coming days watching experts pull apart and dismiss the latest “estimates.” Republicans have become increasingly vocal that the Recovery Act is a failure. Pointing to the stubbornly high 10% unemployment rate, the GOP says the stimulus package has done little to boost the economy.

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Closing Costs & Other Fees

If you are new to the short sale process the sheer volume of closing costs can come as quite a surprise; in fact, it’s not unusual to see closing costs and other fees add thousands of dollars to the total cost of a property. Although theoretically everything is negotiable, some fees are customarily paid by the seller and others by the buyer; either way, every short sale investor should fully understand what they are paying for.

Some of the most common closing costs include:

Revenue Stamps
Title insurance
Title examination
Survey
Appraisal Fee
Real Estate Agent commission
Home Inspection
Termite/Pest Inspection
Recording fees
Mortgage satisfaction fees
Mortgage discount points
Photographs
Repairs
Attorney fees
Lead paint inspection, Radon inspection,
Survey
Recording fees
Mail/Courier fees

Expenses that are commonly pro-rated include:

Rents
Utilities
Taxes
Assessments
Interest on deposits, assumed mortgages or other associated funds
Heating oil or gas
Prepaid service contracts or extended warrantees
Prepaid mortgage insurance and other escrow items
Homeowner association fees

Since short sale investors are often forced to assume the full responsibility for all closing costs when originally purchasing the property, it’s not unusual to reduce the purchase price offer in accordance with anticipated fees and expenses. Properties with excessively high homeowner association fees, back-taxes or other liabilities are at an even greater disadvantage due to the need for higher than average out of pocket expenses. Short sale investors should make this work to their advantage by creating a list clearly delineating all costs to be covered in addition to the lowered bid offer. Remember, this is above and beyond needed repairs, deferred maintenance and other expenses.

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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