Are Short Sales the BIG Solution?

January 11th, 2011

by The KCM Crew on January 11, 2011
Reposted

 The courts are claiming that, if you didn’t ‘legally’ transfer ownership of the loan documents, then you don’t ‘legally’ own it. If you don’t own the debt instruments, you can’t foreclose on them. What does this mean to banks when they handle future foreclosures?

One possibility is that banks may start favoring ‘short sales’ over foreclosures in more cases. The ‘short sale’ option has already been gaining momentum. The OCC and OTS Mortgage Metrics Report shows foreclosures are up 57.5 % year over year; ‘short sales’ are up 82.9%.

Now, with courts scrutinizing the foreclosure process, it may make more sense for banks to work with the current homeowner to sell the home even if it is at a price less than the amount owed on the mortgage. Adding to this possibility is that banks could lose less in a ‘short sale’ than a foreclosure. A ‘short sale’ sells for 81% of what a similar, non-distressed property would sell. A foreclosure sells for 59% of full value.

In the past, banks weren’t concerned with the difference because mortgage insurance companies had the legal requirement to cover the majority of the additional loss. However, insurance companies are now fighting these payments claiming that the original mortgage application might have been fraduantly written. This all adds up to the liklihood that banks will look more favorably at the ‘short sale’ process.

To this point, an article in Housing Wire quoted John Vella, the chief operating officer at technology provider Equator:

“Investors usually see a 20% to 30% better execution on a short sale versus an REO sale when it comes to loss severity. With the foreclosure volume, current and pending REO inventories, servicers will be pressed to do more short sales in 2011…they could see an increase of at least 25% over 2010 in completed short sales.”

Bottom Line
For the reasons mentioned above, the banks will probably lean more toward ‘short sales’. If you are a homeowner not able to pay your mortgage, this may be a much better option then allowing the home to go to foreclosure.

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Short Sales the answers to the Ohio foreclosure problem

October 16th, 2009

Short sales can be a way out of your housing situation.  The owner wins by selling and moving on with their life and their credit history can often be kept clean.  After a short sale they can buy again in 24-36 months FHA.   The bank wins when they recover more of the involved mortgage money as compared to foreclosure, which can take months  to complete, usually causes the home to go vacant,  the home is often stripped by thieves,  and generally creates numerous problems for all people involved.  Lastly, the buyer can often buy more home than they would ordinarilly qualify.

 

Unfortunately, the housing crisis could get a lot worse here.  The next concern may be rising interest rates affecting the inventory of homes and money availability . Let’s cover the interest rate issue first because it is the easiest to explained.  The rates were at a low of around 4.8% in May of 2009 and by August 2009 they were about 5.4% and will probably keep creeping up.  The rates are low because our government is buying mortgage backed securities but according to

 

 examiner.com 8-27-2009 in a speech by Richmond fed pres they may consider a premature end to its program of purchasing mortgage backed securities.

The availability of conventional money or lack of it is easy to explain too. Banks can decide against aggressively working the market now at 5.4% when in March the rate could be as high as 6 or 7 % fixed for a 30 year term.   Plus the housing prices are still dropping at double digit rates, thereby devaluating the asset.

 

Now here are a few facts regarding a more complex subject, the de-valuation of an asset, and how supply and demand can effect the home inventory.  It is said that we have about 12 months of inventory on the market right now at a time when we should have no more than about 3 to 6 months. So we have 2 times the inventory makes the houses worth less. Can anyone guess what that is called.  Yes class, you’re right; DEFLATION.

 

Inventory is about to get higher for a number of reasons.   First there is the shadow inventory.  A Zillow servey of consumer confidence in August of 2009,  29% of home owners said they would be “somewhat likely” to put their homes on the market if they saw signs of a real estate turn around.  That’s a huge number waiting of homeowners on the sidelines just waiting to jump in.  Now they are seeing signs in the media of a turn around but they don’t tell the whole story. Some examples;   the AP headline  of August 26, 2009,  “New home sales up 9.6% in July”.  Cool stuff, huh?  In truth,  new home sales are still down 69% off the peek (not so cool now).  The Wall Street Journal head line of July 29, 2009,  “Prices Rise across the U.S.” . The same Wall Street Journal on August 22, 2009 spoke of   Housing lifts recovery hopes…”but prices are still falling”.

Robert Shiller is aYale economist who helped create the Case-Shiller home price index,  widely thought of as the bible in all matters home price related.  Knowing that the pace of declines had slowed once before in early 2008 said in the Wall Street Journal on August 25, 2009. “its really is too soon to call this a turning point.” So in summary,  this shadow inventory could slow a recovery,  if this is THE recovery, and drive prices down even further,  which will slow they recovery even more, if this is THE recovery . You getting the picture?

Single family mortgages set a new record delinquency rate of 13.16% in the second quarter of 2009,  according to the Mortgage Bankers Association .  The cure rate of for prime loans dropped to 6.6% as of July, down from an average of 45% for the years 2000-2006 (Wall Street Journal  8/24/2009.  If you look at the highest quality mortgages, 6.2 % are seriously delinquent, and while that number may sound low, it represents a jump from 1 % two years ago. In Ohio we rank 10th  in the nation on percent of loans delinquent and in foreclosure according to seeking alpha 8/24/2009.

 

While sub prime mortgages sparked the opening round of housing problems two years ago, according to  Joshua Shapiro,  chief U.S. economist at MFR Inc  “troubles are lurking further up the food chain” and . …”It leads me to believe that the next leg down on home prices is going to come from the top” 

 

The top causes of mortgage foreclosures in the 2nd half of 2008  were negative equity (#1)  followed by unemployment according to the Wall Street Journal of July3, 2009.  Nearly 25 % of all U.S. mortgage holders owed more than their homes were worth by the second quarter of 2009 and that figure may rise to as much as 30 % by mid 2010 as job losses and foreclosures climb.  Stan Humphries, Zillows chief economist said in an interview  “The negative-equity rate will rise and spin off more foreclosures”.

 

Karen Weaver, global head of Deutsch Bank’s Securitization Research said  48 % of U.S. mortgage owners will end up owing more than their home is worth by 2011, with home prices falling as much as another 14 % before hitting bottom.

 

And just where is the point that homeowners start falling into foreclosure RAPIDLY? Once you get to the point where negative equity is significant,  25 % or more. Beyond that studies suggest that you get more strategic defaults. (Fortune. Com 8/12/09.) 

In plain English, at some point a home owner will say “never mind this”, and “I can move down the street and rent cheaper then owning”.  Soon that thought could be followed by  “if I sell short I can buy the same house I live in for substantially less in two or three  years as long as I keep my credit clean.”

 

And it’s a delusional form of optimism to believe that the government CAN / WILL step in and solve this issue. Homes at risk of foreclosure out paced loan modifications; at risk over 3,000,000;  modifications completed less than 500,000.

 

This is why short sales are the de-facto solution for the future. The home owner, the bank and the buyer all win.      

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February 10th, 2009

The housing market in Cuyahoga County is about to take another hit, once again at the hands of our political leadership. Yes, that triumvirate that brought (BOUGHT) you the Ameritrust Tower, is now in a big hurry to get moving on a Medical Mart. That’s right, our trusty commissioners are now in hurry-up mode; getting’ a move-on, let’s get this thing built already fever that is sure to cost us more money in the long run, despite their promise that their site selection will save $100 plus million.

It is this humble realtors opinion that we should fire them all.

After imposing a tax way back in 2007, a tax we never had the opportunity to approve with a pesky vote, WHY is the rush on now? Because we are rapidly closing in on second place in the Medical Mart race, second place to New York city, who took the idea and began action on it immediately. As usual, we are behind the curve and the eight-ball. Always a bride’s maid, never a bride should be our county motto.

Convention experts and the Citizens Committee recommend the Forest City site behind Tower City the Medical Mart. But behind closed doors, the Mall site was chosen. No details given, no explanation of the process of elimination.. But they were quick to cite that we’d reap over 100 million in savings, hoping, I believe, that would become the buzz word for their choice.

We do not live in a county, or a city or state for that matter, that is governed by dreamers and visionaries. We are governed by pragmatists, and in this case, like so many others, I fear we are getting just what we deserve.

With the Cleveland Clinic, University Hospitals and several bio businesses in our area, the Medical Mart makes great sense. It is not hard to imagine that a facility of its kind would be a major asset to Cleveland and its economy. In other cities, (NY, Chicago, LA), such a proposal would probably be greeted by questions like, “Where will you put it” and “When can you start”. Here it takes years to decide between two sites. (the third site was only a last minute proposal by a desperate developer seeking only to re-invigorate his own dying project, and his site vaulted to second choice, after only a few months investigatory period.) It’s no wonder why an idea like this has gained so much momentum in New York.

We should be using the Medical Mart to stimulate other facets of progress in our community. When I was in high school, we had a school like the now defunct Aviation high school. Perhaps the Medical Mart could help to stimulate interest in a medical/science high school, which might feature courses of study in environmental sciences, medical techniques, recovery and rehabilitation services for the medical industry. Maybe medical billing and medical information technologies? A school/program like this could be included in the planning of this Medical Mart, and could give students a start to becoming an MD, RN or LPN, or many other medical related careers. Cures will come from the children who become our next generation of researchers and technicians, and those children can/should/must come from Cleveland.

If our housing prices and economy are going to rebound from this depression (Yes I will use the D word so carefully avoided by our politicians) our city, its leaders and its citizens must all take an active role. We must make serious demands of our leadership, and hold them accountable for their actions. We must demand that they find ways to solve our most serious problems, such as crime and crumbling infrastructure, But they must also look to our future, that of our children and our children’s children.

When we talk about a home that’s in good shape, one that needs just paint and finish, we say it has good bones. Northern Ohio has good bones. We have two of the top 25 hospitals in the world. We have Lake Erie, and the Lake Erie Islands, the Rock And Roll Hall Of Fame, major league sports, the Cleveland Orchestra, the museum of Art. We have good median housing prices.(www.DennisRath.com) We don’t have the traffic of a Chicago or Atlanta Our area has so many advantages, but we must wisely and carefully explore new ways to enhance life on the North Coast.

Like our new President said in his inauguration speech, “It is time to pick our selves up, dust our selves off, and move confidently in to the future.”

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