Foreclosure Crisis Unveiled: Subprime isn’t the real story

Real Estate News & Commentary by Chris McLaughlin, July 3, 2009

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New insight into the foreclosure crisis

According to Stan Liebowitz, professor of economics at the University of Texas, popular explanations such as sub-prime lending and rise in unemployment and interest rates do not adequately explain the high rise in foreclosures since 2007. Liebowitz’s study of foreclosure data, pertaining to the period after the third quarter of 2006 when foreclosures started rising significantly, shows that 51% of all foreclosed homes had prime loans, not subprime. In addition, the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures. In today’s Wall Street Journal, Liebowitz says negative equity — the balance of the mortgage being greater than the value of the house — is the single most important factor driving foreclosures. While one may argue that negative equity does not mean a loss of homeowners’ ability to pay their mortgage, it does point to the possibility that homeowners may be more willing to walk away from their mortgages. Liebowitz argues that methods behind the government’s $2 trillion package for stabilizing house prices are poorly targeted. Liebowitz highlights the importance of underwriting standards, including a requirement of high down payments in mortgages. High down payments would have limited the growth of the housing bubble and the impact of negative equity would have been much smaller when home prices fell. If homeowners have positive equity, they would have lesser incentive to default on mortgages and the lenders’ salvage value, in the event of a default, would be much higher. Liebowitz exhorts politicians to “face up to the actual causes of the mortgage crisis, not fictitious causes that fit political agendas and election strategies.”

Mortgage rates fall; will they stay low?

mortgageratesdown According to Freddie Mac, rates for 30-year fixed home loan dropped this week to an average of 5.32% from an average of 5.42% last week. The rate was 6.35% this time last year. Rates on 30-year mortgage rose from a low of 4.78% earlier this year to 5.6% in June on account of rising yields on government securities. Analysts were worried about the rising mortgage rates hampering the recovery of the housing market. Yields on government securities have dropped in the recent past, leading to a drop in mortgage rates. “Lower mortgage rates are helping to support the housing market,” said Frank Nothaft, Freddie Mac’s chief economist. The average rate on a 15-year fixed-rate mortgage dropped to 4.77%, down from 4.87% last week, while rates on five-year, adjustable-rate mortgages averaged 4.88%, down from 4.99% last week. These rates do not include add-on fees.

Lies, damned lies, and statistics

lies Data drives everything in our economy. The government makes important decisions on the basis of data. But what if the data is incorrect? Robert Kleinhenz, Deputy Chief Economist for the California Association of Realtors (CAR), has said in an interview that the California home sales data for the current year had mistakes. Home sales data pertaining to San Diego county was incorrect on account of a computer error. The CAR had previously reported a 63% increase in April’s San Diego home sales from a year earlier and an 89% increase in May from a year earlier. Thomas Lawler, an independent economist, said last week the numbers reported by the CAR vastly exceeded those reported by other agencies. The CAR has now revised the gain in April to 20% and the gain in May to 6.5%. The mistake is confined to just San Diego data and the state-level data will not be impacted significantly by the downward revision. “It’s going to reduce the statewide number by a couple percentage points, but it’s not going to make a huge difference in the statewide,” said. Kleinhenz.

Seven more banks fail, taking the total to 52 this year

Six banks in Illinois and one in Texas, with total assets of $1.49 billion and deposits of $1.34 billion, were closed by regulators this week. Buyers have been identified for all the closed institutions. The failures will cost the insurance fund of the Federal Deposit Insurance Corporation (FDIC) a sum of $314.3 million. “The six failed Illinois banks are all controlled by one family and followed a similar business model that created concentrated exposure in each institution,” the FDIC said. All the failed banks had significant exposure to the real-estate sector. “The common denominator for most of the bank failures so far has been troubled construction loans,” said Matthew Anderson of Foresight Analytics. “There’s no easy way out with defaulted construction loans in today’s environment.” The number of failed banks this year has risen to 52, the most in a year since 1992. With the economy not showing any signs of sustained recovery, the FDIC’s insurance fund is likely to take more hits in the months to come.

Private equity players unhappy with takeover rules proposed by the FDIC

The Federal Deposit Insurance Corporation (FDIC) has proposed rules which would require firms buying out banks to put in more capital at risk. According to the FDIC’s “source of strength” rule, a bank’s owner should be a source of strength “for their subsidiary depository institutions.” The rule will force private equity firms interested in acquiring or investing in the assets and liabilities of failed banks to stay invested in the bank for at least three years and be capitalized at a Tier 1 leverage ratio of 15%. The FDIC believes that the new rule will prevent the acquired banks from being “flipped” for a short-term gain. The new rules are subject to a 30-day comment period. Not everyone inside the FDIC is convinced about the usefulness of the proposed rules. John Bowman, a member of the FDIC’s board, said the new rule could “choke off capital.” Douglas Lowenstein, president of the Private Equity Council, an industry group, said: “The FDIC’s proposed guidance would deter future private investments in banks that need fresh capital.”

Now on to our real estate investor education section…

The Fear Factor – Fight, Flight or…. Faint?

You have heard it a million times before; buy low and sell high. It sounds simple enough so why do so few people fail to heed this common sense approach to investing? Plain and simple – it’s the fear factor. Successful short sale investors have learned how to proactively invest with their intellect rather than react from an emotional response. Fortunately, once you realize how fear is responsible for the majority of short sale investing mistakes it’s easy to take action and get your investments back on track.

How do you respond to fear and uncertainty?

Fight. Some people are naturally motivated through fear. It provides just the right level of encouragement to get them moving and keep them alert to the potential opportunity afforded by short sales. No matter how bad the market has treated them they realize the need to not go down without a fight and fight they do. These are the people that take inventory, weigh the risk and reward then get busy informing themselves and working the program to begin rebuilding wealth.

Flight. These people are energized all right but they are unable to properly channel that energy into productive results. This is one of the worst situations to be in because it consumes all your time, energy and extra income while leaving you very little to show for it. Sadly, the majority of most self-proclaimed “investors” fall into this category – they believe the activity level makes them an investor…it doesn’t. The proof is in the PROFIT. Don’t trade a lot of activity for actual results – instead, go with a proven system that generates real returns.

Remember, your time and energy as well as hard earned dollars should show a very real profit. It’s okay to begin slow and learn as you go – but learn how to measure the results.

Faint. The fight or flight response is well known in nature but there is one other response less commonly mentioned…the tendency to faint. Have you ever met a person confronted with a perceived threat or something like blood that simply melts away rather than run or turn and confront the problem? Some investors are the same; they become immobilized by fear. Doubt, confusion and outright anxiety over-ride their normal senses. Without a clear plan of action they fall prey to unethical schemes or simply give-up on their hopes and dreams for the future…their own and often that of their family.

Recognize your tendency then take steps to restore your financial future with the help of a short sales system that has been proven to work. Get involved with others able to provide the information and tips you need to succeed until you have a proven track record of success under your belt. It’s one of the best reasons short sales remain such a popular investment vehicle; you can start at whatever level your tolerance for risk, level of energy and assets allow. There is literally something for everyone.

See you at the top!
Chris McLaughlin

http://www.shortsalesriches.com

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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 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
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banks fail