Walking Away: The Impact on Housing

There is a growing trend in this country of people walking away from their mortgage obligations. The definition of a 'walk away' borrower is one who has the financial means to continue to make their mortgage payment but decides not to. This situation is also called strategic default. The incidence of people taking this path is growing dramatically. A study done by The Chicago Booth/Kellogg School Financial Trust Index reported: The number of homeowners willing to default when the value of a mortgage exceeds the value of their house, even if they can afford to pay their mortgage, dramatically increased compared to just a year ago. The percentage of foreclosures that were perceived to be strategic was 31 percent in March 2010, compared to 22 percent in March 2009. In a news release announcing the report Paola Sapienza, professor of finance at the Kellogg School of Management at Northwestern University and co-author of the report said: "With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments." Strategically defaulting on your mortgage has been supported by many main stream players such as a law professor at the University of Arizona, the New York Times and the Wall Street Journal which said in a blog post that: Whether we like it or not, walking away from debts is as American as apple pie. What impact does this have on the housing market? PRICES House prices are determined by supply and demand. The supply of distressed (discounted) properties lowers the values of all the homes in the area. These foreclosures are added to the mix of comparables used by appraisers to establish value on homes sold. If a  borrower decided to short sale instead of walk away, the property would sell for approximately 86.9% of full value while a foreclosure sells for only 57.3% of full value (according to First American Core Logic's Distressed Property Report). Freddie Mac in a news release probably said it best: Let's start with the neighbors. When strategic defaults occur, homes go into foreclosure and sit vacant for some period of time. We know from experience that foreclosures and vacancies drive down the property values of everyone else in the neighborhood. Thus, strategic defaulters, in effect, deplete the personal wealth of their neighbors. Get a critical mass of strategic defaults, and broader communities and regions become affected. Indeed, Economy.com, the analytic firm, recently said that more strategic defaults could tip a fragile housing market back into one of further price declines. Even more families harmed. As prices fall, more borrowers fall into a position of negative equity (their house is worth less than the mortgage). This is the number one reason people 'walk away'. This past week a Seeking Alpha article entitled Housing: Could Strategic Default Turn into a Full Blown Movement? reported: Many homeowners are unlikely to sit idly by while their neighbors walk away from their underwater mortgages. But one thing is certain: if strategic default becomes a widespread trend then a double dip in housing prices has moved a lot closer to becoming a done deal. LENDING GUIDELINES Banks are trying to deal with this new phenomenon of 'walking away'. No one could blame them if they started to price into mortgages the risk to which they are now being subjected.  Freddie Mac, in the same news release mentioned above, discusses this exact point: Should strategic defaults become more common, mortgage guarantors and investors, including Freddie Mac, would need to factor this risk more prominently into their credit policies and prices. The likely impact on future homebuyers: the cost of a mortgage will go up and credit terms will be less flexible. Thus, the impact of strategic defaulters on still more families might be more expensive mortgages and loans that are more difficult to obtain. The strategic defaulter does not usually consider these costs. What does this mean to you? The value of your home is being adversely impacted by those that walk away. The cost of your next mortgage may also be affected.

5 Things Sellers Must Require of a Real Estate Agent

Are you thinking of selling your home? Are you dreading having to deal with strangers walking through the house? Are you concerned about getting the paperwork correct? Hiring a professional real estate agent can take away most of the challenges of selling. A great agent is always worth more than the commission they charge just like a great doctor or great accountant. You want to deal with one of the best agents in your marketplace. To do this, you must be able to distinguish the average agent from the great one. Let us help. If I were hiring an agent to sell my home today, I would require they: 1. Tell me the truth about the price Too many agents just take the listing at any price and then try to the 'work the seller' for a price correction later. Demand that the agent prove to you that they have a belief in the price they are suggesting. Make them show you their plan to sell the house at that price - TWICE! Every house in today's market must be sold two times - first to a buyer and then to the bank. The second sale may be more difficult than he first. The residential appraisal process has gone through a complete overhaul in the last twelve months. It has become more difficult to get the banks to agree on the contract price. A red flag should be raised if your agent is not discussing this with you at the time of the listing. 2. Understand the timetable with which my family is dealing You will be moving your family to a new home. Whether the move revolves around the start of a new school year or the start of a new job, you will be trying to put the move to a plan. This can be very emotionally draining. Demand from your agent an appreciation for the timetables you are setting. I am not suggesting that your agent can pick the exact date for your move. You just want the agent to exert any influence they can. 3. Remove as many of the challenges as possible We are still in a market which heavily favors the buyer. With buyer demand steady at best and inventories of homes for sale climbing, the buyer can feel that they have all the power in the negotiation. It is imperative that your agent know how to handle the challenges that will arise. An agent's ability to negotiate is critical in this market. Remember: If you have an agent who was weak negotiating with you on the parts of the listing contract that were most important to them (commission, length, etc.), don't expect them to turn into Superman when they are negotiating for you with your buyer. 4. Help with the relocation If you haven't yet picked your new home, make sure the agent is capable and willing to help you. The coordination of the move is crucial. You don't want to be without a roof over your head the night of the closing. Likewise, you don't want to end up paying two housing expenses (whether it is rent or mortgage). You should, in most cases, be able to close on your current home and immediately move into your new residence. 5. Get the house SOLD! There is a reason you are putting yourself and your family through the process of moving. You are moving on with your life in some way. The reason is important, or you wouldn't be dealing with the headaches and challenges that come along with selling. Do not allow your agent to forget these motivations. Constantly remind them that selling the house is why you hired them. Make sure that they don't worry about your feelings more than they worry about your family. If they discover something needs to be done to attain your goal (i.e. price correction, repair, removing clutter), insist they have the courage to inform you. Good agents know how to deliver good news. Great agents know how to deliver tough news. In today's market, YOU NEED A GREAT AGENT!

Those Who Walk Away Could Be Penalized

The number of people 'walking away' from their mortgage obligations has reached epidemic proportions in this country. Strategic defaults account for 31% of all mortgage defaults. Walking away from an underwater house may seem like the easiest way out of the financial burden created by your monthly mortgage payment. And it looked as though there was no real downside to doing it.

That has now changed. The FHA and mortgage lenders are starting to let borrowers know that you will pay a price when you try to re-enter the housing market in the future if you walk away today.

The Los Angeles Times in an editorial on strategic defaults reported:

During debate last week on a bill (HR 5072) to shore up the Federal Housing Administration's mortgage insurance program, the House decided to crack down on such "strategic defaults." Lawmakers agreed to a proposal by Rep. Christopher Lee (R-N.Y.) to make those who strategically default ineligible for new FHA-insured loans.

CNN Money reported two weeks ago:

While homeowners who default due to economic hardship, such as a job loss or divorce, normally must wait two to five years before buying a home again, walkaways may face double that time.

"It could be well over seven or eight years before [walkaways] are able to obtain a mortgage to buy a home again," said Jay Brinkmann, chief economist for the Mortgage Bankers Association.

So lenders may look at applications from one-time strategic defaulters and say, "Yes, they walked away but it's a whole different market now," according to Keith Gumbinger, of the mortgage information publisher HSH Associates.

Even so, lenders may require more from borrowers who walked away than those who didn't. "To the extent they could get a mortgage," said Brinkmann, "they can count on needing a heavy down payment." The lenders may ask for 30% down or more. That would provide enough collateral cushion that the bank could get all or most of its money back in a foreclosure. Strategic defaulters might also be charged higher interest rates, even above the levels other borrowers with similar credit scores would receive.

Before walking away, a borrower should get counsel from an expert to find out what future price they will pay for doing so.

Distressed Properties Impact the Value of YOUR Home

 

There are times in our lives when we have it better than many of our family, our friends and our neighbors. We try to help in any way we can. Yet, to some degree, we are relieved that we are not impacted by their challenges. Many people look at the heartache in the current housing crisis this way. People we know are struggling to pay their mortgages and some are even losing their homes to foreclosure. We may reach out with a helping hand but we are relieved that our house is not being impacted. 

I want to let you know the value of your house IS BEING IMPACTED! The housing crisis has tentacles that are far-reaching and affecting values of homes in almost every neighborhood in the country. Let me explain.

Distressed properties (foreclosures and short sales) impact the values of surrounding homes in two major ways:

1. They increase housing inventory

The concept of supply and demand applies to the value of any item in the world. The greater demand, the higher the price. The more supply, the lower the price. As more and more distressed properties enter the supply of homes available, the more prices will soften. The Miami Herald reported yesterday that foreclosures throughout the country are predicted to surge:

Real estate experts predicted this week that 3.5 million homes nationally will go into foreclosure this year as risky adjustable-rate mortgages written in 2005 reset and unemployment continues.

That's up from 2.8 million homeowners who faced foreclosure in 2009, and sets a pace that isn't likely to plateau until late 2011, said RealtyTrac Senior Vice President Rick Sharga.

2. They lower average sale prices

Distressed properties are sold at a discount. Studies have shown that a 'short sale' will sell at 86.9% of a non-distressed sale in that area. A foreclosure will sell at 57.3% of a non-distressed sale. The higher percentage of homes sold at a discount, the lower the average home price in that area.

Let's look at the following chart to clarify this point:

We can see that the 'mix' of properties sold has a dramatic effect on the average sales price of homes in a community. Appraisers are infact using distressed properties as comparables when establishing value on a neighboring non-distressed home sale. Those neighboring  foreclosures and short sales do impact your value.

What does this mean to you?

If you are thinking of selling, put the home up for sale now. You want to beat the flood of foreclosures predicted to come to market later this year.

News Alert! The Luxury Market Has Returned

There is no longer any question that luxury homes are beginning to sell.  The high-net-worth client has marked 2010 as the year to again start purchasing real estate and their desire is turning into sales. Financing is beginning to open up in the 'jumbo' market and prices are starting to reflect true values as upper end foreclosures are starting to mount. What does this market have in store for us as we move forward in 2010? That will be determined by supply and demand. DEMAND Obviously, demand is increasing. The Wall street Journal reported: After a near-disastrous 2009, the luxury market appears to be making a comeback, driven by growing buyer confidence, improved financing conditions and more-realistic seller pricing. Despite the housing downturn, attractively priced homes in some of the nation's most coveted neighborhoods are selling, sometimes fast and sometimes with multiple offers. Nationwide, sales of homes selling for $2 million to $5 million in the first quarter totaled 2,461, up 32% from a year before, says CoreLogic. Here is a graph from the Wall Street Journal article: We can see that sales have not reached the levels they ballooned to from 2004 - 2008 (and probably never will) but have attained the level of sales of the more normalized market prior to the housing bubble. This consumer will not be impacted by the tax credit. There is no reason to believe that demand will wane as we move throughout the year. SUPPLY There is already a huge supply of homes in this category on the market. That supply will increase as more and more luxury homes find their way through the foreclosure process. The numbers of upper end homes going into foreclosure is surging. We can look at the following graph to see that, even at the higher ends, people are not keeping current on their mortgage obligations. These homes will create an ongoing stream of discounted properties in upper end communities. What does this mean to you? This market is showing signs of life. The volatility is concerning. If you are either a buyer or seller at these price points, get great counsel from a real estate professional experienced in the luxury market.

Is FHA Trying To Become LESS Popular?

Posted: 03 Jun 2010 03:00 AM PDT There is a buzz in the real estate and mortgage world that says that FHA is moving towards changing how they charge insurance premiums - again!  And the proposal I am hearing is going to reduce the number of people who are eligible for the FHA Program, as well as make the program less attractive. Let's start by explaining that, contrary to the public's consensus, the FHA is not a lender, they are a government owned insurance company.  They collect premiums from borrowers and insure lenders of repayment, if those borrowers default on their mortgages..this insurance allows lenders to loosen their underwriting standards and approve many more applicants.  Presently, they charge these premiums in two different ways: 1. The UFMIP (Up Front Mortgage Insurance Premium) for most FHA loans is levied at 2.25% of the loan amount.  The good news is that while it is a closing cost, the UFMIP can be (and usually is) financed..added on top of the base loan amount.  So, for example, on a $200,000 base loan amount has a $4500 UFMIP; therefore, the total loan amount is $204,500.  Because it is financed in the loan amount, our borrower is paying $24.17 in their monthly P&I payment to cover it (at a 5% note rate). 2. The second insurance charged is the MMIP (Monthly Mortgage Insurance Premium).  Currently, for most FHA loans is calculated by multiplying the principal balance of the loan by .55% and dividing by 12.  Because the principal balance is constantly being reduced as payments are made, the MMIP adjusts downward annually until such time as the principal balance is reduced to 78% of the purchase price (which will be a minimum of 5 years, but typically 12-14 years).  In our $200,000 example the MMIP is $91.67.  This amount, too, is added to the mortgage payment. As you know, a major factor in approving borrowers is that borrower's ability to repay the loan which is determined by dividing their debt by their income.  Any increase in payment makes it harder to qualify.  In our example, our borrower's qualification includes a total of $115.84 to cover the FHA insurance premiums. Now look at the proposed changes.  FHA wants to reduce the UFMIP to 1% and increase the MMIP to 1.55%.  On its surface it doesn't look tragic, but let's look at our example $200,000 loan.   Our total loan amount is now $202,000, which means the monthly impact of the $2000 is $10.74 (as opposed to the $24.17).  BUT, our MMIP has been increased to $258.33 (a whopping $166.66 more)!  In total, our borrower's mortgage payment will go up $153.23!!!! What's the real impact?  The same borrower that qualifies for a $200,000 FHA loan, based on their income, will only qualify for $172,000 loan.  They will have to look in different neighborhoods and/or sellers will need to reduce their prices further to keep the same buyers interested in their home.  It has the same effect as interest rates going up more than 1%..I shudder to think what the cumulative effect will be if this happens AND rates go up.

Thinking of selling your home? Now, could be the time!

#1 Threat to Housing Recovery: Shadow Inventory Posted: 02 Jun 2010 04:00 AM PDT The concept of supply and demand is relatively easy to understand. It applies to real estate as it applies to any other industry. We must look forward to determine the upcoming supply of housing inventory just like every other industry does. As an example, let's assume I own a hardware store in town. I have done $1 million in retail sales each and every year for the last ten years. What should I budget to do in sales over the next twelve months? Approximately $1 million seems like the correct answer. However, if I found out a Loews or Home Depot was building a store in the vacant lot across from my store, should I change my planned budget? Of course I should. What does this have to do with the current real estate market? There is a 'Home Depot' being built as we speak. It is called 'shadow inventory'. 'Shadow inventory' consists of homes that are not yet on the market but fall into one of these categories: � Houses that have not come to market because the homeowners didn't put their homes up for sale in the last few years hoping that by waiting they will get a higher price. � Homes that have already been reposed by the banks (REOs) but not yet on the market. � Homes that are in already in the foreclosure process but have not yet been reposed by the banks. � Homes that are 90+ days behind on their mortgage payments (less than one percent will ever catch up. 99% will become a distressed sale). What number are we talking about? Pent-up Selling Demand Zillow just recently released a survey on the category of 'pent-up selling demand'. They asked: "If you saw signs of a real estate market turnaround in the next 12 months, how likely would you be to put your home up for sale?" The responses extrapolated to show actual numbers: � 5.3 million home owners would be 'very likely' to put their home up for sale � 6.1 million would be 'likely' � 10.6 would be 'somewhat likely' By comparison, 5.2 million existing homes were sold during 2009. Assorted Distressed Properties There have been several organizations that have attempted to quantify the other category (delinquencies, homes in the foreclosure process and REOs). Here are their findings: � The Mortgage Bankers' Association believes that there are 4.3 million homes in this category. � Barclay's Capital puts the number at 4.7 million. � Capital Economics says 5.5 million. � Morgan Stanley, in a very recent study, claims 8 million. Total Shadow Inventory If we take the lowest number in each category, there could be an additional 9.4 (5.3 + 4.1) million homes entering the market. Again, by comparison, 5.2 million existing homes were sold during 2009. What does this mean to you? If the concept of supply and demand applies to real estate, there will be a tremendous downward pressure on prices.