cram downs

Real Estate News & Commentary by Chris McLaughlin, February 19, 2009
http://www.shortsalesriches.com/welcome.html

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Ok, before we get started will you do me a favor? Please forward this e-mail to every Realtor and real estate investor you know. I’m getting inundated for my opinion on the latest housing bill and its impact on short sales and REOs. So here’s the truth of what is really going on.

It is much ado about nothing … unfortunately our friends in the media know little about the housing crisis that we’re living through, but let’s start talking about this new “Homeowner Affordability and Stability Plan” that was announced by the President.

They are saying that the plan will enable “up to 4 to 5 million responsible homeowners to refinance.” That’s true … and a great boom for loan officers and title companies, but let’s look a little more at these claims that they will stop foreclosures. It helps folks who right now aren’t the ones really struggling … and ignores the folks under water on their mortgage beyond 5%.

Let’s read directly from the White Houses’ summary:

“Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.”

Yep, they sure can do that … but guess what? Most of the folks who will take advantage of this are not the folks that are in foreclosure or currently facing foreclosure! If they have a conventional mortgage with Fannie and Freddie, they aren’t the issue right now … for the most part, the subprime garbage is.

But there’s a magic number out there … 105%. Yes, that’s what we’re talking about. If the loan is less than than 105% of its current market value, they might be eligible for refinance. But come on! Most of the people in foreclosure purchased with 100% financing … you know, the 80/20 loan. Most homes lost at least 15% of value last year, and in California, Nevada, Arizona and Florida, just double that to at least 30%. This plan does nothing for these homeowners.

Now let’s think about this further. In order to refinance with Fannie and Freddie, you have to not only have equity in your home (or in this case you can’t be under water more than 5%), but you also have the meet the guidelines for a loan refinance. That means you have be employed. You must have a job. NINJA (no income, no job, no assets) loans aren’t around anymore. So everyone who just lost their job doesn’t qualify for this help.

But is this a good idea, regardless of whether it won’t help people facing foreclosure? Yes. If we can reduce mortgage rates that will allow more Americans to have more money in their pockets, which translates to more consumer spending. Frankly I like this idea a lot more than the $400 a year tax credit that will do little to actually help our economy.

Unfortunately, with 80% of distressed properties having a first and second mortgage, modifications for those who were over leveraged is going to be next to impossible unless they’ve been paying extra payments to bring down their loan balance. So what did Obama signal that he supports?

Cram downs.

What is that?

That’s when a bankruptcy court judge steps in and basically modifies loans and cuts its principal. But here’s the rub: if you violate the sanctity of contracts, you will add uncertainty to the end investor, which means he’s not willing to pay as much for the loan portfolio, which drives up interest rates.

Will cram downs slow short sales?

NO! Come on folks, the reason people do short sales is to save their credit and stop a foreclosure. Do you think those doing short sales want a bankruptcy on their record? No, those are the individuals that don’t want to a short sale anyhow … those are the ones that really want to stay in the home and believe with a modification they can afford it.

What cram downs may do is create an incentive for lenders to approve more short sales and modify more loans. Why? Because they don’t necessarily want to roll the dice with a bankruptcy court judge.

But I read that these banks are putting moratoriums on foreclosures? Won’t that mean fewer REOs and short sales?

Who owns the majority of loans in trouble? It isn’t the banks! It is the investors that purchased these loans. They then hired a servicing company to service that loan on behalf of Collateralized Debt Obligation A23GE63 in Singapore. This is critically important: the majority of homes in foreclosure are not owned by banks, they are owned by investors who bought mortgaged backed securities.

An article in the Wall Street Journal today noted that these investors are now threatening to sue the servicer if they screw up a modification or mishandle a foreclosure. “The securitization has split the interest in the home loan among so many different parties that it is difficult for servicers to make a modification without fear that some significant party may sue or do something else that hurts the servicers,” Kurt Eggert, a professor at Chapman University, told the Journal.

So, we’ve talked about loan refinance and cram downs. What about the modification for those who are in foreclosure? What is that all about?

First, the lender reduces the interest rate on the mortgage to no more than 38% of the borrower’s income. (Note: what if they don’t have a job…kinda hard to do, huh?)

Second, the government will match dollar for dollar the reduction from 38% to 31% debt to income ratio (government is buying down interest rates, not a bad idea, but the investor has to take the hit getting to 38% which many of them won’t do).

Third, lenders must keep the modification in place for 5 years.

In order to incentivize lenders, the government will pay the $1,000 for the initial modification and then will give a $1,000 payment for the next three years if the loan is current.

Then the government will give a carrot to the homeowner of a $1,000 principal reduction for up to $1,000 each year for the next 5 years.

So does this do anything to really stem the foreclosure tide? Unfortunately not really … because lenders know the nasty statistics that most folks don’t want to talk about.

But the New York Times told it to everyone on its front page today. Guess what? Read it for yourself: “The nation’s 14 largest banks reported that more than half of the loans they modified last year were delinquent again after just six months, according to the federal bank regulator, the comptroller of the currency.”

Yes, after just six months over half of the modifications that were done went back into foreclosure. Why? First of all, a lot of people that never should have been homeowners became homeowners with 100% financing. They aren’t ready for the responsibility of owning a home and aren’t able to manage their finances accordingly. Second, the economy has a lot of folks wiped out and they’ve lost their job. And third, after paying for a property that they know is $75,000+ underwater, at some point they just walk from it because it frankly doesn’t make economic sense to keep it, especially since their credit is shot already because they’ve missed so many payments. They can bail out now, rebuild their credit, and buy something again in a few more years (with a short sale they only have to wait 2 years).

So what really happened yesterday? A big mess just got messier. False hope was given to millions of people facing foreclosure that own homes that are never going to get refinance or modified in a meaningful manner.

Now on to our investor education section …

Short Sales & Foreign Investments

Short sale investors with access to key markets with international appeal would do well to understand the basics about selling to foreigners; despite relative gains on the part of the dollar, the exchange rate remains highly favorable to foreigners interested in purchasing domestic real estate. Plus, unlike other nations, the United States remains “foreign” friendly by allowing non-residents to own property.

Fortunately, with the emerging economies around the world beginning to show an interest in other cultures and travel, even relatively modest homes can benefit from working with international buyers. Foreign vacation homes and affordable destinations are no longer reserved only for the rich; many middle class Europeans, rising young Asians and others are taking advantage of once in a lifetime buying opportunities to purchase a home of their own in the land of the free. Learn how to maximize potential profits by tapping into the lucrative foreign market with these quick tips:

1. Evaluate the property carefully. Excellent examples of property of interest to foreign investors or buyers includes vacation homes, property located in major metropolitan areas such as New York City or Washington D.C., property located in close proximity of international airports and/or those with established access to colleges, hospitals or other desirable amenities.

2. Make it meaningful. Speak the language. You will obtain better results by placing ads in both English and whatever other language you wish to target but don’t stop there! Understand how the cultural perception will influence how your home is viewed. For example, while white walls may seem clean and fresh to Americans’, potential buyers from Asiatic cultures often associate white with death. Make sure your ads are appealing both in word and picture for the target market.

3. Watch the exchange rate. Exchange rates fluctuate dramatically so plan to spend a bit extra setting up an escrow account and other banking that is experienced with foreign transactions. Don’t skimp on overnight delivery – delays can literally cost hundreds or even thousands of dollars due to variations in the exchange rate. Specify how all funds will be paid, in what time period and in what form. It is highly recommended to require funds in USD to avoid major variations.

4. Keep track of time. Don’t’ assume your buyer will be in the states during the period of the sale and transaction. Long distance transactions are increasingly the norm especially among the “jet set” crowd so use time marks and remain flexible when dealing with oversea transactions.

5. Take it to the bank. One of the best reasons for selling to international buyers is the ability to create a win-win for all involved. International buyers are often used to high sales prices where American properties still seem like a bargain; combined with favorable exchange rates don’t’ be surprised to find them downright giddy. On the other hand, you get top price for a property. Yes, it is a little extra work but often well worth the time to learn the nuances of working with international buyers.

See you at the top!

Chris McLaughlin

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

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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 flipping of distressed homes. Owns
      portfolio of nearly 100 high-value, high-profit
     properties

    * Owner and Supervising Broker 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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Market News & Commentary by Chris McLaughlin, January 9, 2009
http://www.shortsalesriches.com/welcome.html

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Are you a Realtor looking to make serious money in 2009? The Holy Grail of REO is coming to an end, as the last of 50 Seven Figure REO Wealth Building Systems will be sold this weekend. The other 450+ systems flew off the shelves this week. The product was developed by Chris Guldi, one of the TOP REO Agents in 2008 with GCI from foreclosures over $1.5MM. If you want his secret list of asset managers and tricks to making more money than ever in real estate, go here now to be among the final 50 to listen to Chris LIVE on Saturday at 5 PM ET:

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There was a little bit of news that dampened the New Years’ good spirits today, as the Labor Department reported that the nation’s unemployment rate is now 7.2%, the highest level in 16 years. For the full year in 2008, there was a net loss of 2.6 million jobs. And the news is expected to worsen, as a lot of companies that put off layoffs due to the December holidays are now in full-blown layoff mode. In another sign that incomes are dropping, corporate America also reduced the American workforces’ hours to an average of 33.3 hours, the lowest level since records began on the subject in 1964. President elect Barack Obama stated that “Today’s jobs report only underscores the need to move with a sense of urgency and common purpose.”

Now on to real estate investor education …

New Year’s Resolutions for the Short Sales Investor

Admit it. Your New Year’s resolutions look a lot like last year’s list don’t they? If you are like most people then near the top of your list is “get in shape” followed by some type of ambiguous financial goals. The trouble with most New Year’s resolutions is they fail to energize, motivate – or even make sense. When was the last time you REALLY got excited about cutting back or doing without? Rather than emphasize the negative, it’s time to create a realistic list of positive goals designed to make a lasting difference in your life. Here are some more tips designed to transform wishful thinking into reality for the coming year.

Write it Down. Researchers have discovered the mere action of taking the time to write it down increases the odds of actually putting the plan to work.
Tell it to Others. Commit to the plan of action by making it known to others; whether in person, via telephone or simply as part of an online discussion. Let others know of your goals.
Be Specific. Get into the nitty-gritty details; duration, specific amounts, locations or other pertinent information should be spelled out in as much detail as possible.
Measure Continuously. Set a schedule to measure progress on a continuous – and frequent basis.
Work toward it Daily. Make it a regular part of your routine to do at least one item toward your goal on a daily basis throughout 2009.
Dare to Dream. Don’t discount your own dreams or ability to profit…it is what excites and motivates people to take action. While the rest of America is sitting on the side-lines while the greatest buying opportunity of a generation sits in front of them, those who dare to dream of a better life are capitalizing upon it.
Get a Mentor. It is important to banish negativity from your vocabulary and personal goal’s; while a healthy dose of constructive criticism is always warranted – that is quite different from negativity. Constructive criticism is born of information and experience while negativity stems from fear. Surround yourself with knowledgeable professionals who are successful in the short sales field rather than those to fearful to take action.
Educate Yourself. Information and education are key to growing in any field. In fact, common wisdom holds it takes a minimum of 1,000 hours to become fully informed about any given topic. To put this into perspective, 1,000 hours is the equivalent of 25 weeks of full-time work. Fortunately, you don’t need to start from scratch. Benefit from the wisdom of others that have gone before you and customize it to your own situation.
Invest in Success. Perhaps one of the biggest mistakes most real estate investors make is failure to invest in success. Whether it is your time, money or simply opportunity cost required to put short sales real estate to work – the fact is you must make up your mind to invest in your own success before anyone else will follow.

Cram-Downs Could Hurt

If some members of Congress have their way, one aspect of the foreclosure prevention plan formerly shunned by lawmakers may be revived. It could spell bad news for banks should it come to pass: mortgage cram-downs. Essentially, the legislation would allow judges the right to rewrite a mortgage in order to make it more affordable to the current homeowner. While initially that may appear to be a good idea, critics point to several potential pitfalls:

Increased losses among banks. Currently, loan modifications among homeowners demonstrate dismal rates; in fact, nearly half are already falling behind. Critics point to a worsening of the current housing crisis that could spread on for years rather than putting the worst behind us and getting on with the future by selling the homes to those willing and able to make them profitable.
Restructuring may increase long-term competitive interest rates. By allowing a judicial mortgage modification on a “per case basis” there is fear it could slow the long term recovery of the housing market by driving prevailing market rates higher. Banks will no longer be able to justify mortgages on individual risk and will be required to offset losses in much the same manner as healthcare increases rates to compensate for write-off’s.
Decreased lender incentives. Currently many banks are willing and able to negotiate new terms based upon individual situations but federal oversight could standardize what is/isn’t expected.
Increased down payments. If passed, reform measures are also likely to increase the down payment requirements, PMI and other associated costs of obtaining a new mortgage in addition to the increased long term interest rates. Once individual assessments are not able to be adequately measured and predicted, lenders will be forced to compensate by adjusting all rates to the potential risk of under-writing less qualified individuals and homeowners.
Negative Incentives. To date, most mortgage modification programs have worked with current homeowners to restructure the interest rate, duration and other terms of the mortgage without impacting the principle owed. Increasingly, cram-down advocates are calling for the ability to totally re-write both the terms and principle amount of the mortgage owned creating the potential for a negative incentive. Because of this potential problem, advocates are also urging Congress to consider implementing more aggressive bankruptcy reform measures aimed to prevent both foreclosures and associated bankruptcy proceedings.

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See you at the top!

Chris McLaughlin
http://www.shortsalesriches.com/blog

P.S.:

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He promised you hard-core real estate investment videos
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P.P.S.:

Are you a Realtor looking to make serious money in 2009? The Holy Grail of REO is coming to an end, as the last of 50 Seven Figure REO Wealth Building Systems will be sold this weekend. The other 450+ systems flew off the shelves this week. The product was developed by Chris Guldi, one of the TOP REO Agents in 2008 with GCI from foreclosures over $1.5MM. If you want his secret list of asset managers and tricks to making more money than ever in real estate, go here now to be among the final 50 to listen to Chris LIVE on Saturday at 5 PM ET:

https://www2.gotomeeting.com/register/693464027

The Truth About Yesterday’s Housing Plan & Its Impact on Short Sales & REOs

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