It would be almost impossible to be out of the reach of media in 2008, although it might actually be healthier. But via television, video, web, texting, tweetering, pda, cell, phone and what my grandmother used to call gossip, information and misinformation surrounds us like air. Sometimes the information is difficult to understand due to its volume and its inconsistency. The sub prime mortgage mess is a great example of this problem. What is true and what is real?
Approximately 46,000,000 people have mortgages in the United States. Incidentally, more than one third of Americans own their homes outright, that is without any mortgage. Sub prime mortgages typically are adjustable rate mortgages. Many people took out this type of mortgage to ‘get into’ a home without documenting any income. Most of the mortgages had a low ‘teaser’ initial rate and payment. Many of these loans will adjust after 2 years. The adjustment would increase the interest rate and the payment. A good number of these mortgage holders cannot afford the new payment. In each quarter of 2008, 450,000 mortgages are likely to ‘reset’ to a new rate and payment. Many buyers can not afford the pre-reset payments. Therefore, it is a major problem. The Federal Reserve and the Government are trying to help minimize the impact of ‘non performing’ mortgages by helping the borrowers, lenders, and investors. The economic stimulus package addresses some of the problem. Increases in conventional mortgage ceilings, from 417k to 475, and the increase in FHA mortgage ceilings from 316k to 475K will help. Even with all of these efforts, there are a significant number of foreclosures, short sales, and ‘walk a ways.’ Walk a ways are when the homeowner simply moves out and leaves. Short sales are a protracted process of selling the house for less than the mortgage value.
There are some great opportunities with foreclosures and short sales. The March 24th National Association of Realtors monthly numbers showed an increase in sales and a price reduction due in part to the impact of ‘REOs,’ Real Estate Owned, by the lender.
The real challenge in the market is that the lenders are not equipped to handle to volume of REOs. Any real estate broker dealing with REOs will tell you it is very difficult. It is not usual to wait 2 or 3 months for a response to an offer. It is obviously very difficult to keep a buyer interested. The result of that delay is a further deterioration of the value of the property and sometimes a deterioration of the condition of the property. Some foreclosed properties have suffered water damage, vandalism, etc. Foreclosed properties also hurt the value of the neighborhood. We must recognize that the lenders do not want instructions on how to run their businesses, but this is a perfect storm of hurricane proportions. The lenders would ‘recover’ more of the value of the property if they sold the properties more quickly. The non producing mortgage becomes recovered cash when the house is sold. This would be true even if the lender sold the property at a low price.
It should not take 3 months to get an answer after a house is in short sale mode or has been foreclosed.
As a potential buyer, there are great opportunities with short sales and foreclosures if you are patient and persistent. You must be prudent and you need to know what you are purchasing. Many of the properties have issues that nothing short of a comprehensive inspection would uncover. Some have been trashed. Sometimes the lenders are generous. Last summer there was supposed to be a sale on a property in the 470’s. The lender was owed almost 500k so they refused to close. That same house came on the market last week at 329k. At last count there were over 20 offers. Someone is going to do very well. Often short sale and foreclosed properties are sold between 10 and 20% below market value. It is important to have representation and inspection to ‘protect’ your position. But there are buyers out there and there are opportunities as well. If you have been trying to time the bottom, the clocks of some of the short sales and of foreclosures have struck midnight. It is a time of great opportunity.
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