Next wave of the mortgage crisis?
Real Estate News & Commentary by Chris McLaughlin, May 21, 2009
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Next wave of the mortgage crisis?
The subprime crisis is flowing through the system and grabbing everyone’s attention, but coming soon to a city near you are all the other exotic mortgages, like Option ARM (pick-a-pay), Alt-A, etc. These homebuyers may have had better credit, but they had the same strategy: Get a low interest rate upfront, and then deal with the reset down the road, by either refinancing or selling the home. The trouble is, now that many properties are worth less than they were, that’s neither easy nor very desireable, and these mortgages are just starting to reset. Zacks analyst, Dirk van Dijk, says: The number of these recasts is relatively small right now — at about $1 billion per month — but that number is set to grow dramatically over the next few years, exceeding $8 billion per month in the fall of 2011.
If the equity in your house is gone and your monthly mortgage payment suddenly jumps from $2000 per month to over $3000 per month, what do you think is going to happen? How about if one or both of the people in the household has been laid off? Unlike sub-prime mortgages, these were for the most part targeted at more upscale homeowners, meaning that the next wave of foreclosures might be in gated communities, instead of the ‘wrong side of the tracks. The biggest writer of these housing finance vehicles was Golden West, which was bought by Wachovia, which was then absorbed into Wells Fargo.
Unemployment at record high
The number of people filing claims on an ongoing basis rose to a record high for the 16th straight week for the week ending May 16, with 631,000 people filing initial claims, although the Labor Department shows that the rate is down 12,000 from 643,000 the previous week. The economists at Briefing.com were wrong as usual, having forecast 625,000 initial claims, according to a consensus estimate. The 4-week moving average, which smoothes out volatility in the labor market reading, was 628,500, a decline of 3,500 from the previous week’s revised average of 632,000. In the week ended May 9, the most recent data available, 6.66 million continuing claims were filed. That’s the highest number since the Labor Department started tracking the data in 1967 and an increase of 75,000 from the revised level for the previous week. The Labor Department’s monthly jobs report for April, released May 8, showed the unemployment rate at 8.9%, a 25-year high.
Fed outlook worsening
The Federal Reserve’s forecasts, released as part of the minutes from its April meeting, include an expectation for higher unemployment and a steeper drop in economic activity. The central bank had forecast in January that the jobless rate would be in a range of 8.5% to 8.8%, but the unemployment rate topped that in April, hitting 8.9%. What’s worse is that the unemployment rate is expected to rise to between 9.2% and 9.6% this year. The Fed has also revised its expectations for the gross domestic product to post a drop of between 1.3% and 2% this year, significantly more than a previously expected 0.5% to 1.3% decline.
Fed members did indicate they expected GDP to increase slightly in the second half of this year, but not enough to overcome the anticipated declines in the first half. GDP shrunk more than 6% in the first quarter. In the minutes, Fed members indicated that there are a number of factors that “would be likely to restrain the pace of economic recovery over the medium term” and added that the credit crunch would “recede only gradually” and that “households would likely remain cautious” in their spending.
Economy will grow in third and fourth quarters
The Congressional Budget Office says the economy will start growing in the second half of 2009, but it will be several years before the positive effects of a turnaround will be felt. “Even if the economy returns to positive growth this year, the loss in output, income, and employment during the recession and the next few years will be huge,” said Doug Elmendorf, director of the CBO, in testimony before the House Budget Committee. The agency is expecting that the unemployment rate will continue to rise into the second half of next year and will peak above 10%. In March, CBO forecast unemployment would hit 9.5%. The $787 billion economic stimulus package enacted in February is boosting GDP numbers this year and, to a lesser extent, will do so in 2010 as well. Thereafter, economic growth will be hindered if private demand does not pick up, according to Elmendorf.
Bank mergers coming?
At last count, there were close to 8,300 banking organizations across the country, according to the Federal Deposit Insurance Corp, and while that is down nearly 10% from the number of banks just five years ago, many experts contend that more mergers will be necessary, especially among smaller banks. As you know, earlier this month federal regulators demanded that 10 of the nation’s largest 19 financial institutions raise a combined $75 billion in new capital to deal with potential losses if the economy deteriorates further, but lenders of all types are overwhelmed by loan losses.
“There are some market forces that are working in favor of another round of M&A,” said Khanh Vuong, a vice president in the banking group at rating agency A.M. Best. Most of these leading institutions have been able to quickly exploit investors’ renewed appetite for banks by selling stock in recent weeks, but regional and community banks are finding it difficult to undertake similar capital-raising efforts. That, combined with the fact that many banks are now trading at historically low levels, suggests that it could be only a matter of time before some of these smaller banks look to pair up in order to remain competitive.
Now on to our real estate investor education tips section …
Why Banks are Sitting on Their Non-Performing Assets or Shadow Tracking for Short Sale Investors
Short sale investors increasingly have two major concerns on their mind…the seemingly elusive and nearly ghost-like decision maker at the lenders office and the rise of shadow inventory. Both are prone to appear as some type of aberration in the minds of sellers, other investors and the public at large. But, like all good ghouls and ghost-stories, there is typically a reasonable explanation for what initially appears to be an irrational situation.
To sum up the problem, those unfamiliar with the real status of short sales often fall victim to actually believing what they hear in the news or from other less than reputable sources; things like “the market is on the way up” or “all the good deals are gone” but before you throw your hands up in the air to walk away, it may be a better idea to get a grip on the actual status of foreclosures and potential short sale inventory.
Fact – Banks were given an extension that allows them to delay filing for foreclosures. Many of these homeowners were still unable to pay but now, instead of the foreclosure process taking three months it is taking six months instead. In the long run, that simply means the current homeowner ends up owing even more – and the bank has gone even longer without receiving any compensation.
Fact – Lenders have already foreclosed upon millions of homes = many of which are not yet listed for sale. According to experts at Moody’s and RealtyTrac, over a half million homes may already be in foreclosure but unlisted…in addition to those already listed. Wondering why banks would sit on their non-performing assets rather than go ahead and list the home? It’s simple; banks don’t want to further drive down the price of homes (and therefore the remainder of the assets/loans) by putting too many homes on the market all at once. Likewise, low interest rates continue to cut into profits….and of course, many are hoping for federal funds to help compensate for some of the eventual losses.
Fact – A significant number of lenders do not advertise bank-owned properties in the traditional MLS or other typical advertising situations. This leads to an often complex and inaccurate measure of the true number of bank owned properties on the market in any given area. What this means is the number of homes actually available for sale in any given market may be 125 to more than 100 percent of that listed in the MLS.
Fact – According to recent analysis, distressed properties – including those facing imminent foreclosure – represent between 1 percent to nearly 6 percent of all properties listed in the local MLS…highly impacted areas such as Florida, Nevada and California tend to run near the top of that range. To get a better understanding of the potential short sale inventory in your area, extrapolate from the numbers above….it’s easy to see there is plenty of room for profit for short sale investors.
Remember, it’s up to you to help lenders stop sitting on their non-performing assets – begin by tracking those shadow stats and start making offers today.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com/welcome.html
P.S.: Don’t miss our webinar this Thursday night at 8:30 PM ET,
5:30 PM PST:
https://www2.gotomeeting.com/register/292738091
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