Interest Rate Hikes, Local Inventory Levels, and Subprime Fraud Lip Service

Yes, the picture to the left is as accurate a depiction of how us real estate folks feel after the week we just endured.

Let's see what I can isolate as the 3 biggest issues that have come onto my radar screen for this second week of June...

Mortgage interest rates. UP, UP, and AWAY!!!

UP to 6.5 percent for conforming mortgages this week, even as high as 6.75% at one point. Good luck getting that quote to stick for more than a couple of hours.

UP again, for Jumbo Mortgages (over $417,000 of loan amount), reaching as high as 8.675 or higher. Jumbo's affect the luxury housing market in Chicago's far western suburbs, the Tri-Cities of St. Charles, Geneva and Batavia, certainly. They also affect modest dwellings in the nearer suburbs, like Oak Park or Arlington Heights (to stab blindly), where prices are substantially higher. The crowd of buyers that can afford a half-million dollar mortgage at close to 9% interest is an understandably small one, and they expect a lot more for their money nowadays.

Rates have been attributed to tough talk about inflation from the U.S. Federal Reserve. As I look at overall economic news, I start to wonder if housing isn't a small problem in the macro-picture. It seems that Ben and friends thought the same thing, and it caused a small ripple in the mortgage bond market, as concerns that bond values would drop in the face of higher rates (impacted by rate hikes at the Fed) over the next few months.

And AWAY! Away with mortgage perps'. Good to see that they've nabbed every last mortgage fraud'ster. 400 of our "finest" real estate practitioners were hauled off to jail for inflating stated incomes, misleading values or uses for properties, and other fraudulent tactics used to secure for loans. As the AP line depicts, the real victims in the subprime mess is "consumers" and "lenders." Consumers are the everyday folks who never fibbed on their stated incomes, source of funds (gifts depicted as savings, etc.), or never really heard or understood that their loans were adjustible. Lenders, we are told, were blissfully unaware of the sources of their record crushing revenues. The next step is arresting oil company executives, and then our ever-benevolent government will likely give us free gasoline out of the goodness of their hearts.

Looking at the data for housing inventory levels, locally, I am not yet inspired to announce the end of the housing downturn. Taking a closer look at our months' supply of inventory in the Tri-City area, you'll note that we are well above last year's inventory level, caused by fewer sales and more homes listed for sale. Foreclosures, of limited importance last spring and summer, are taking a heavier toll on the local market, along with short sales. Failed rehabs and new construction gluts, however, are far less prevalent this time around.

The Federal Reserve Bank of New York offers us a handy tool with which to view the state of the nation in terms of mortgage delinquencies, and precursors thereof. Check it out. You can ZOOM IN ON YOUR ZIP CODE, and compare the foreclosure rates, loan to value ratios, number of ARMs adjusting, percent of no-doc loans, and so forth.

Innovation Amidst Housing Recession - Change Your Mortgage!

Everyone is talking about the housing market downturn, and the impending doom for all of the world's people. Foreclosures will surely swallow us all, regardless of how responsible your own financial picture may be. There is one thing that economists rarely remember to take into account - The resilience and creativity of individuals in the marketplace. Case and point, the present real estate downturn:

Investors -- including big fish like former Countrywide Financial Corp.
President Stanford Kurland as well as smaller fry like Gentry -- are buying
loans on the cheap from lenders who want them off their books. By paying
less than face value for the mortgages, the new holders can modify loan
terms, including shrinking the amount owed, and still make money.

As numerous homeowners struggle to make higher adjusted mortgage payments, or face personal circumstances (divorce, health problems,job loss) that prevent them from keeping up with their obligations, there seemed to be no other way out. Many cannot get out of their loans by selling their homes, since they purchased properties utilizing 100% mortages, or refinanced at a similar loan-to-value ratio. Further, banks across the nation have been facing a struggle of defaulting subprime mortgage portfolios - bets that made sense two and three years ago. With everything stacked against these parties, and the fallout of their misfortunes seeming quite vast, the prospect of savvy investors saving the day sounds like an enormous blessing - and a profitable one for them. Read on:

With some economists projecting 2 million foreclosures this year, legislators
and regulators are hoping to encourage wide use of this model. They want lenders
and investors in mortgage bonds to mark down what borrowers owe and then provide
them with lower-cost loans. It's a tricky business: No one wants to be seen as
bailing out speculative buyers or imprudent lenders, but they also don't want
mass foreclosures to devastate neighborhoods and the economy.

The greatest enemy of this program, however, appears to be the victims, themselves. Fewer than 50% of homeowners who are delinquent on their subprime mortgages are willing to return phone calls regarding lender work-out plans (mortgage lenders attempting to renogotiate loan terms in order to keep a homeowner in their home, and paying agreeable loan terms). Many homeowners worry that lies told regarding stated income, or other fraudulent information given to lenders, will come back to haunt them. Given the widespread existance of such fraud, on behalf of homeowners and lenders, investors buying subprime mortgage notes are not making fact-verification of old mortgage applications a matter of importance.

The headline here reads of an innovation that may save the real estate market, and the broader economy. It may as well read:

Homeowners Facing Foreclosure: Call Back Your Lender!

Source:
Investors move in to save broken mortgages
Los Angeles Times, E. Scott Reckard
http://www.latimes.com/business/la-fi-loanbuyer-2008may01,0,3521729.story

Are Foreclosures in your Neighborhood Worrying you about your Home's Value?

As well they should. Foreclosures, short sales, tax sales, and generally "distressed" sales are obviously negative impacts on your neighborhood's home values. If your neighbor's foreclosure just sold for $250,000, and your home was valued at $300,000, one would worry about whether yours is now worth only what your defaulting neighbor's home sold for. There are two aspects of this concern - The difference between "today's foreclosure" and the prevailing appraisal guidelines of the present market.

Today's Foreclosure v. Yesterday's Foreclosure

In real estate's not so distant past, foreclosures were an ugly, ugly beast. Horror stories floated around that discouraging many home buyers from even considering foreclosed properties in their house-hunts. Before home buyers were evicted from their homes they often left a stinging reminder of their emotional loss. Foreclosures were renowned for being hazardous waste sites - deserving of HAZMAT teams that came in the form of eager, hard-working rehabbers. Every fixture or valuable material was extracted from properties - entire copper plumbing systems, furnaces, faucets, electrical conduit, mill work, toilets and ceiling fans. Filth of every type was left behind - pet feces, pet bodies, months of garbage, unplugged refrigerators brimming with food, walls spray-painted with expletives, the list went on. In the past, most of these properties were purchased sight unseen - perhaps an investor would be able to peek in through windows to understand the mess they might be buying into.

Today, foreclosures are a different animal, entirely. Sure, the ugly ducklings exist, and they go for a severe discount. Some properties have boarded up windows, but most do not. In fact, most foreclosures need such undaunting work as new carpeting in select rooms, some paint, and maybe a door or two that has been punched into, or drywall needing to be patched. In some occasions these properties have been very poorly maintained. In other scenarios, however, the reason home owner's are in a financial bind is because of recent renovation of their home. I recently sold one that had a newly installed furnace, central air conditioning, and a perma-sealed crawl space.

The plus side of this contrast is that neighboring homes that are in foreclosures are not stigmatizing neighborhoods in the manner they have in the past. The negative side is that foreclosures are indeed more similar to resale homes than ever before.

Appraisal Standards

Appraisers utilize comparable properties to your home when they appraise a property for a mortgage lender - be it for a purchase mortgage or a refinance. Presently, appraisers classify foreclosures, short sales, and bank owned properties differently than resale single family homes. The homeowner looking to refinance does not need to judge their property directly against the foreclosure down the street, but may still have trouble finding recent enough sold properties in the area. While foreclosures do not "count against you" directly, appraisers are now restricted more than ever before in what they can, or cannot, utilize in their "comparative analysis" approach. Some lenders require sold properties to be 3 months or more recent - almost all require comparables to be no more than 6 months old. Finding properties that weight in your favor can still be a challenge.

While foreclosures are not a good thing for anyone looking to sell their home, they are not direct comparables to your home. They will compete better than ever when it comes to the attention of home buyers, but a move-in ready home, in great condition, will command an entirely different price point.