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Less demand for mortgage loans

After easing their standards in July, commercial banks reversed that trend in October, the Federal Reserve reported Monday after surveying loan officers at 77 banks.  Smaller banks — those with annual sales of less than $50 million — mostly tightened their standards for traditional mortgages in the last three months, and large banks — those with assets of more $20 billion — widely left their standards unchanged, the Fed said.  Signaling that banks are continuing to crack down on the riskiest mortgages, less than half of the banks participating in the survey made sub-prime loans in the last three months.  In the latest Fed survey, many banks reported weaker demand across a broad range of loans, including mortgages, credit cards and business loans.  At the same time that banks tightened or left standards unchanged for mortgages, almost all the banks in the Fed survey reported easing standards on commercial and industrial loans over the last three months.  And while some smaller banks tightened their standards for approving credit cards, most large banks eased their standards in that category.  Banks cited a “less uncertain economic outlook” and increased competition from other banks, as reasons for easing their standards, but said they don’t expect still-tight lending standards to return to their pre-recession averages for the “foreseeable future.”

Bankruptcy filings up 14%

In the federal government’s fiscal year 2010, which ended September 30, more than 1.5 million non-business bankruptcy filings were processed, according to data released Monday by the Administrative Office of the U.S. Courts. That’s up more than 14% from fiscal 2009, when about 1.3 million personal bankruptcies were filed.  Personal bankruptcy filings have been climbing steadily since 2007, when the U.S. fell into a deep recession that has left millions of Americans unemployed. The economy has improved but with sluggish growth, and the recovery in the labor market has been painfully slow.  The number of non-business bankruptcies filed last year is the highest since fiscal year 2005, when over 1.7 million personal bankruptcies were filed. The spike in 2005 came just before Congress amended the bankruptcy code, making it harder for Americans to complete the process, which sparked a rush to file before the changes took effect.  In fiscal 2010, Chapter 7 filings spiked nearly 15% to over 1.1 million, from 989,227 in fiscal 2009. Chapter 13 filings, in which debtors are typically required to repay debts according to a budget plan that the court sets up, rose 9.2% in the year. Chapter 11 filings fell 3.8%.  Meanwhile, business filings decreased slightly in fiscal 2010, according to the Courts. Bankruptcies filed by a corporation or partnership totaled 58,322, down 0.7% from the 58,721 business filings in 2009.

Olick – the 3 Fs mean trouble

“Now that we’ve gotten the Q3 reports from Fannie, Freddie and the FHA, the picture of housing’s future is becoming ever clearer.  The combined Real Estate Owned (REO) inventory of the three rose 24 percent quarter to quarter and 93 percent year over year.

In real numbers, at the end of Q3 there were a record 293,171 REO’s sitting on their books. This of course doesn’t count REO held by the banks and private label securities. That’s up from 153,007 at the end of Q3 2009.  Granted, the GSE’s and FHA have disposed of (sold) an awful lot of properties. In the first 9 months of this year they’ve sold over 200,000, but that still leaves us, net, with the above numbers, which are also rising at a fast clip.  Now let’s add the foreclosure mess. 

The numbers I just reported don’t account for the foreclosure sale freezes that are still in place in many states, because the freezes didn’t happen until the very last few weeks of Q3. REO inventory will likely drop precipitously in Q4, as all those foreclosures sit in limbo with no sales and no evictions, only to surge again once the banks get the paperwork flowing again.  None of this should come as any surprise, given that the number of bank repossessions surged to new record highs at the end of the summer.  So why am I bombarding you with all these numbers? Because as I have always said, over and over, housing’s recovery is based almost entirely on inventory.  We can talk prices, affordability, confidence, foreclosures, scandals, politics, whatever you want, but in the end it comes down to supply and demand.  We are looking at a ballooning supply coupled with dwindling demand. You do the math.”

Consumer debt slashing nears $1 Trillion

Total consumer debt was $11.6 trillion as of Sept. 30; down 7.4%, or $922 billion, from the peak reached in the third quarter of 2008, according to the Federal Reserve Bank of New York. Consumer indebtedness fell another 0.3% in the third quarter, after a 3.3% decline in the prior quarter.  In addition, total household delinquency rates fell for the second consecutive quarter. The report said 11.1% of outstanding debt was in some stage of delinquency at the end of September — compared to 11.4% on June 30, and 11.6% a year earlier.  About 457,000 people went into foreclosure in the third quarter, a 5.5% decrease from the number of new foreclosures in the second quarter of this year. Bankruptcies also fell 16% from the previous quarter. 

Excluding the effects of defaults, non-mortgage debt fell for the first time since 2000, according to the Quarterly Report on Household Debt and Credit. Also, mortgage debt paydowns, which began in 2008, reached nearly $140 billion by the end of 2009.  The number of open credit card accounts fell 24% from their peak in 2008.  At the state level, Arizona, California, Florida and Nevada continued to post higher-than-average delinquency and foreclosure rates than the nation as a whole.  “If consumers can continue to repair their balance sheets, that bodes well for the sanity of the economy in the long term,” said economist John Canally of LPL Financial.

Home prices drop 5%

According to the Clear Capital Home Price Index, national home prices fell 5% for the three months ending in October, while double-dip disparity still rages on a micro-market level.  The data joins a chorus of bad news, both on Altos Research‘s falling home prices and an unexpected rise in mortgage defaults for first time this year according to an Amherst Securities report.  Home prices dropped only 0.2% in the three months prior to September, but a major two-month decline through October had not been seen since early 2009. While prices in October remain 7.7% above 2009, they have dropped 6.8% from the year’s peak in mid-August. Clear Capital said six of the largest local markets are officially in a double-dip.  Prices dropped 3.1% in the West through October, 4.7% in the South, and 2.2% in the Northeast. In the Midwest, though, prices dropped 8.7%.  Atlanta, New Orleans and two Ohio markets — Columbus and Dayton — experienced quarterly price declines more than double the national rate.

Now for our real estate education section…

Insurance Insights

Insurance is a major consideration when it comes to purchasing and investing in real estate…it’s also one of the most frequently overlooked areas. Most buyers automatically assume the insurance will take care of itself and is simply a question of making a few calls; unfortunately, the insurance industry is in a state of flux especially when it comes time to insure marginal properties. Today we are going to cover a few of the basics surrounding the purchase of insurance and selection of short sales and other real estate investments.

Why Insurance Matters

Insurance matters more than you might suspect; failure to obtain flood insurance has recently resulted in dramatic slow-downs in many properties across the nation, lack of affordable insurance can dramatically impact the bottom line of an investment property and inability to insure a home in need of repairs may negate the ability to find financing. These are just a few of the frequently encountered concerns surrounding the purchase of insurance.

Top Insurance Questions for Investors

1. Is the property located in a flood zone? If so, can I obtain affordable flood insurance? If you aren’t sure, start with this free flood map finder by FEMA: http://www.msc.fema.gov/webapp/wcs/stores/servlet/info?storeId=10001&catalogId=10001&langId=-1&content=firmHelp_1&title=How%20to%20Find%20Your%20Flood%20Map.

2. What is the claim history of the property? Obtain a CLUE report to find out if there has been extensive claims or other concerns that might increase the cost to you or a future buyer. Remember, savvy buyers are increasingly concerned about extraneous costs including insurance, HOA fees and property taxes. Higher than average expenses are likely to reduce the attractiveness of the property in the eyes of prospective buyers.

3. What is the current cost of coverage? The current cost of coverage may or may not reflect your anticipated expenses for insuring the property but it will provide a glimpse into whether or not the property is insured, with whom and a rough idea of how much. Obtain at least three different insurance quotes and be sure to specific the address to find out if the company is writing new policies in your area.

4. Will you need specialized coverage for renovations, repairs or vacant properties?

5. Is the property eligible to be insured? Some properties may not be insured until repairs are made or a Certificate of Occupancy is granted. Consider whether or not you are ready to “self-insure” during the process.

6. Can you obtain a mortgage with/without the insurance policy as quoted?

7. What forms of insurance are necessary? In some instances it may be preferable to select only a portion of the coverage such as liability or replacement value rather than comprehensive coverage.

See you at the top!

Chris McLaughlin
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Copyright Loss Mitigation Institute LLC 2010.

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
    * Follow me on Twitter: http://twitter.com/mclaughlinchris
    * Join my Facebook Fan Page: http://www.mclaughlinchris.com
–

I hoped you noticed.  For the last two months, the smart money started to cut its losses.

Notice how Kirk and his company “Tracinda” dumped all those shares of Ford stock last month?  Seems he bought at over $6 a share, yet shortly thereafter, he dumped it at a little over $2 a share.  It trades for around that price right now, a month later.

He took a huge loss and walked away. Now, we all know that a smart guy like him would not take a loss like that unless he thought that he’d take an even bigger loss in the future.

So that points out the obvious: there are few high growth opportunities today for investors, yet everyone keeps watching the Dow every day, waiting for that chance to line up like a lemming, and leap off the cliff.

Sorry, that’s a little too risky for my tastes.   And I’m a guy who actually sold his company to Jim Cramer of CNBC fame.  I sold SmartPortfolio.com to TheStreet.com back in December 2000.  I took the chips off the table, and I was glad I did.

Instead I’ll stick with the shifting real estate market.  Real Estate has actually turned into the biggest investment opportunity we’ll ever see in our lifetime.

This “down market” has changed everything.

See, buying and flipping pre-foreclosure houses is now in the “mainstream.”  That was the first step towards making real estate the best investment today.

The next step was making it possible to turn real estate investing into a structured BUSINESS.  That little stroke of genius led to the next step:

Automating a short sale system so it could run by itself at a high sales volume, allowing many small sales to add up to huge profits.

It was like a blessing.

Now, anyone willing to work 3 – 6 months on their short sales business may never have to “work” again!

But don’t take my word for it.  Check out the details here:

http://www.shortsalesriches.com/welcome.html

Now, on to our real estate investor education section …

Lender or Servicer?

Here’s a little tip that should help short sale investors when working with owners facing foreclosure or default; few homeowners actually try to negotiate a deal or settlement even when facing financial ruin. Of those that do, most don’t understand the difference between negotiating with the lender or servicer. Here is how to explain the benefits and limitations of each when working with homeowners:

Servicer

Since most home loans are not kept ‘in-house’ but rather sold and serviced by a third party, the first point of contact is often the servicer. The servicer often has limited capacity to extend payment terms – usually up to two or three months. They often send “workout packages’ of forms that require the homeowner to fill out information on their current situation and then establish a temporary intervention with repayment arrangements.

The majority of homeowners that have fallen behind on mortgage payments have already contacted the servicer and may have even attempted a temporary reprieve or loan repayment program. Once the temporary provisions “run out” they homeowner often believes there is nothing more that can be done…to an extent they are correct since servicers do not have the authority to approve more extensive modifications to the terms of the loan. This is where the lender comes into play.

Lender

The lender actually owns the loan and will be the final approval for all major negotiations related to repayment terms or short sale offers. Most homeowners fail to distinguish between a lender or servicer. Tracking down lenders isn’t always straightforward especially when a loan has been sold multiple times (a common practice). Servicers are required by law to provide full contact information for all lenders upon request. Since few homeowners even know to ask it’s not surprising they have never been in contact with their lender. Lenders are often more responsive than servicers since they have the final authority required to negotiate more stringent “deals’.

When negotiating a short sale offer, investors will typically work with lenders. By taking the time to explain all available options, it may be possible to convince current owners to consider a short sale rather than other more punitive or damaging choices.

Exploring All Options: Count the Cost

When working with homeowners in financial distress it is often helpful to explore all their options while listing the time and cost associated with each choice. Not only does it help the short sale investor demonstrate why their offer is more attractive to the bank and owner but helps formalize the benefits in the mind of the seller.

1.     Bankruptcy. Not only does bankruptcy ruin their credit score and limit their ability to obtain a new mortgage for several years but it is costly and time consuming. The average cost of filing for Chapter 13 is $3,000 to $4,000 while Chapter 7 typically runs between $500 to $2,500.

2.     Refinancing. Although most homeowners considering a short sale will not qualify or be interested in refinancing the home for a variety of reasons, there may be a few situations where they might. In addition to understanding the current market value of the home, it is important that homeowners understand the full cost of refinancing a home including extended payment plans, closing costs and other fees frequently “wrapped’ into the loan. In many cases, the monthly payment might be lower but the long term cost of keeping the home is equal to much more than the current value of the home.

3.     Foreclosure. Walking away is easy unless you live in a state that allows the lender to sue you for deficiency; then it can become a homeowner’s worst nightmare. While there may be short term financial benefits to be derived from saving up mortgage payments and then simply walking out on the home, the long term consequences easily offset any short-term gains.

4.     Short Sales. Short sales often create a win-win for the current owner and new buyer; understand the current needs of the seller then work with them to create a contract that takes their most urgent and pressing concerns into account. From lease-backs to the ability to financially recuperate from the short sale in a fraction of the time of other options most people will be relieved to learn they still have options available.

See you at the top!

Chris McLaughlin, J.D., M.B.A.
web: http://www.shortsalesriches.com/welcome.html
e-mail: info@shortsalesriches.com

Phone: (800) 452-7627

P.S.: Are you going to the National Association of Realtors Convention this weekend?  Look for us!  We’re at booth #2054!