Real Estate News & Commentary by Chris McLaughlin, June 25, 2009
http://www.shortsalesriches.com
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Why would I do that for no charge? Because
I want a chance to tell you about the other
high-income opportunity, too.
And I can’t do it in an email.
But if you’re finally ready to blast out of
this economic mess, then get a move on… I’d
hate for you to miss out, because we always fill
up a day or so early. See if there’re any spots left:
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New-home sales drop slightly
According to the Commerce Department, new-home sales dropped 0.6% in May over April, to an annual pace of 342,000 units. This is below what economists had estimated, and well below the 509,000 annual pace of May 2008. The median home price rose from $212,600 in April to $221,600 in May. Inventories of new homes fell to 292,000 units in May. At the current rate of sales, it would take over 10 months to clear the stock of unsold homes. Economists believe that home prices have to fall further to clear unsold home inventory. Joshua Shapiro, chief economist with MFR, says the inventory of homes for sale “will remain enormous, particularly with increased competition coming from distressed sales of existing homes.” Michael Moran, chief economist at Daiwa Securities America, said homebuyers are seeing more attractive opportunities in the existing-home market than in the new-home market. “Builders are less inclined to offer discounts and throw in amenities now that inventories are better under control,” said Moran.
Is HVCC hurting the housing industry?
The Home Valuation Code of Conduct (HVCC), a guideline which introduces a firewall between lending institutions and appraisers, came into effect on the first of May this year. According to Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, HVCC is meant to “improve the reliability of home appraisals,” by preventing fraud in the appraisal process. Lenders and brokers who wish to sell loans to Fannie Mae and Freddie Mac can no longer select an appraiser themselves, instead, they should approach an independent appraisal management company which will assign an appraiser for each deal. This would effectively stop collusion between lenders and appraisers leading to inflated home values. Appraisers and lenders say that HVCC, instead of helping the industry, is hurting it. A number of honest and efficient appraisers have been hit because the appraisal fee should now be shared between the appraisal management company and appraisers, instead of appraisers taking the entire fee. There have been instances of appraisal management companies assigning appraisers who have no familiarity with local conditions and data to appraise properties. This leads to incorrect estimates, and incorrect estimates, in turn, lead to buyers and sellers walking away from deals. Lawrence Yun, chief economist of the National Association of Realtors, has warned that the housing market recovery can get delayed and there could be a rise in foreclosures, if problems related to appraisal are not quickly corrected.
Orders for durable goods surge for the second straight month
Durable goods orders rose 1.8% in May, surprising economists who had predicted a 0.6% decline. The rise in May follows a rise in April and the back-to-back monthly gains indicate that the recession may be coming to an end. “Economic figures, such as the durable goods orders, show that we’re not falling off a cliff”, said Frank Ingarra, a fund manager at Hennessy Funds. Orders for non-defense goods, excluding aircraft, rose 4.8% while orders for computers and related products rose 9.4%. Orders for machinery rose 7.7% percent, the most in more than a year. Dean Maki, chief U.S. economist at Barclays Capital, said: “The government stimulus has helped income, stabilizing consumer spending, and that’s showing through in better orders.”
Rebecca Blank, undersecretary of commerce for economic affairs, said that the durable goods orders data can be volatile, and cautioned against reading too much into it. Economists say they are yet to see convincing signs of recovery. “The U.S. factory sector still has a long way to go and is facing the headwind of one of the deepest global contractions in a generation,” said Cliff Waldman, an economist with the Manufacturers Alliance/MAPI.
Energy Department to lend $8 billion to 3 automakers
The government has expressed its commitment to support energy efficient vehicles by announcing an $8 billion loan to Ford, Nissan, and Tesla Motors. The Energy Department will provide the loan out a $25 billion fund, to develop fuel-efficient vehicles. Energy secretary Steven Chu said: “By supporting key technologies and sound business plans, we can jump-start the production of fuel efficient vehicles in America. These investments will come back to our country many times over by creating new jobs, reducing our dependence on oil, and reducing our greenhouse gas emissions.” Ford will receive $5.9 billion to upgrade its 11 factories in the Midwest to produce hybrids and electric vehicles. Nissan will receive $1.6 billion to build advanced vehicles and a battery manufacturing facility, while Tesla would get $465 million to build electric vehicles and electric drive powertrains in California. “This is a tremendous development,” said Alan Mulally, Chief Executive Officer of Ford. Tesla CEO Elon Musk said the Tesla would use the loan “precisely the way that Congress intended — as the capital needed to build sustainable transport.” General Motors and Chrysler failed to qualify for the loan program since they were not considered “financially viable” by the Energy Department.
Hedge funds too want to be left out of new regulations
The Obama administration proposes to include hedge funds along with venture capital funds in its financial overhaul plan. The venture capital industry has already said it is “relatively inconsequential” and should be exempted from the new regulations. Now hedge funds have joined the chorus. Hedge funds have had a terrible time in the recent past with dwindling returns and large capital outflows. After battling markets, hedge funds are now looking at battling Washington. Richard Baker, who heads the Managed Funds Association (MFA), the industry’s lobbying body, is leading the charge. The MFA has been meeting with Treasury officials with idea of pushing its agenda to make changes to the financial reform proposal. Baker says hedge funds should not be deemed “systemically important,” and hence should not be subjected to greater scrutiny by the government. Many analysts disagree. “It’s disingenuous for anyone to claim in this day and age that no hedge fund is systemically important,” said Andrew Lo, a professor at the Massachusetts Institute of Technology and an expert on hedge funds. “Frankly I don’t think any hedge fund manager in his right mind could argue that the industry needs no oversight.”
Now on to our real estate investor education section…
The Problem of PMI and Short Sales
A lot of short sale investors become very confused as soon as PMI is mentioned. PMI or Private Mortgage Insurance is that monthly fee many homeowners pay each and every month for what appears like no apparent reason (in their opinion). Of course, there was a reason for it and if you are contemplating a short sale deal, that reason was a valid concern. PMI was created for the express purpose of insuring against default by home buyers that didn’t put at least 20 percent down when purchasing a home. The idea was simple enough; real estate rarely ever falls and when it does, it rarely falls by much more than 20 percent. Because the majority of mortgages are amortized, the closing costs and larger up-front payments effectively reduce the risk even more. To compensate for the difference between anticipated losses and the actual loss of any profit (after taking amortization etc into account) the homeowner would be forced to pay for PMI until the loan to debt ratio fell below 80 percent. Sounds like a good plan of protection so what could be the problem when it comes to short sales?
Well, the thought process is like this…if the PMI or private mortgage insurance will cough up a higher cost in the event of a default than the short sale offer then it’s less likely they will want to negotiate below a given amount. However, this isn’t always the situation. In some instances the primary mortgage holder will accept a short sale offer if there is a second mortgage or promise of future payment – a controversial but relatively common situation since legally the current homeowner is responsible for any gap. Of course, faced with the prospect of losing their home and still owing money, most homeowners tend to either walk away entirely or simply file for bankruptcy protection. Because of the drama associated with PMI and short sales, many investors simply opt to avoid them altogether. Before making that decision it’s important to clear up a few myths surrounding PMI and short sales…
- PMI pays up to 20 percent…not 80 percent. The private mortgage insurance was put into place because the original owner didn’t put at least 20 percent down…it’s the difference between 100 percent financing and 80 percent (or whatever amount above 80 percent financing obtained for the original loan).
- Transactions costs, maintenance fees and other expenses must also be taken into account.
- AIG United Guaranty is one of the larger entities holding many of these issues. As you know (or should know), AIG is facing just a few problems of their own to the point that some mortgage companies no longer want to negotiate directly with the PMI during the course of a short sale.
So, the bottom line is this; when making an offer for short sales on any property be sure to find out for sure (don’t leave it to the homeowner to know or understand if they pay PMI) if the property is impacted by PMI. If so, realize that some of the loss will be mitigated by the PMI and plan your calculations accordingly. Should you decide to continue the negotiation process, be sure you fully understand the additional level of complexity added by the existence of PMI into the equation.
See you at the top!
Chris McLaughlin
http://www.shortsalesriches.com
PS:
“2 Careers That Boom in a Recession!”
I’ll tell you about one of these for fr*ee
in my no-charge, no-cost, no-obligation
webinar right here live Thursday at
8:30 PM ET, 5:30 PM PST:
https://www2.gotomeeting.com/register/792140858
Why would I do that for no charge? Because
I want a chance to tell you about the other
high-income opportunity, too.
And I can’t do it in an email.
But if you’re finally ready to blast out of
this economic mess, then get a move on… I’d
hate for you to miss out, because we always fill
up a day or so early. See if there’re any spots left:
https://www2.gotomeeting.com/register/792140858
Copyright Loss Mitigation Institute 2009.
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 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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