Boomer’s Blog

Hoping to stabilize free-falling home prices in foreclosure-plagued neighborhoods and stimulate sluggish housing markets, the White House has announced that for one year only, the Federal Housing Administration will suspend its anti-flipping policy which requires a 90-day waiting period for foreclosure sales. At the same time, it’s extending government-backed mortgage insurance to a larger group of foreclosure buyers.

Rehab this Foreclosure Flip
Though a positive step towards resuscitating stagnant real estate markets, these homes still have to be sold to owner-occupants, and many flippers may find that this policy change is of little help to their businesses. To meet FHA guidelines requiring that homes be “safe, secure and sound,” many of these real estate owned (REO) homes likely will require more extensive rehabbing than they would probably receive if the FHA were not involved.

Homeowners who can’t afford their mortgage payments probably don’t keep up with maintenance. And there is an increasing prevalence of disgruntled and distressed homeowners vandalizing their homes when they’re forced out by foreclosure. Though real estate investors with a knack for rehabbing may see some benefits through this change, it seems unlikely that it’ll have the far-reaching impact on high-foreclosure real estate markets that the Fed is hoping for.

REI to the Rescue
What irks me is that this waiting period foolishness was implemented five years ago specifically to curtail opportunities for working real estate investors to make money in real estate by flipping houses for a living. Now that the economy is a wreck and the current selling season is not stopping the bleeding, who does the government call upon to get the markets moving again? Real estate investors, do you hear your phones ringing? Here is how the FHA rationalizes its flip flop on this issue:

” . . . FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This prohibition is intended to prevent property ‘flipping,’ a predatory practice that strips a home of its equity before being quickly resold at an inflated price to an unsuspecting buyer. FHA’s new policy will permit the immediate sale of foreclosed properties to legitimate borrowers wishing to use FHA-insured financing.”

Will the Real Equity Strippers Please Stand Up?
What exactly did the lenders accomplish with their business practices? The Mortgage Bankers Association’s (MBA’s) Q1 report highlights the sixth straight record-shattering quarter of home loans entering foreclosure. The MBA’s seasonally adjusted total delinquency rate is the highest recorded by the association since 1979: Nearly 3 million home loans, or 6.4 percent, are missing at least one payment, while approximately 737,000 are three months or more past due on their payments. These numbers all but promise that foreclosure rates will continue to rise.

According to the MBA, 1.1 million homes, or 2.5 percent of all loans serviced by the association’s members currently are in foreclosure. That’s up from the 2 percent of loans, or about 938,000 homes, that were in foreclosure at the end of 2007. The report also shows that 448,000 homes, or about 1 percent of loans members serviced, entered foreclosure during Q1. In Q4 2007, 382,000 homes reportedly entered foreclosure.

Foreclosure Epidemic Spreads Beyond Subprime Loans
These aren’t just the subprime adjustable rate mortgages (ARMs) we’ve heard so much about. Foreclosure among all loan types is on the rise. Here is a quick breakdown, according to Jay Brinkmann, MBA’s Vice President for Research and Economics:

• While subprime ARMs represent 6 percent of the loans outstanding, they represented 39 percent of the foreclosures started during Q1.
• Prime ARMs represent 15 percent of the loans outstanding, but 23 percent of the foreclosures started.
• Among the 516,000 foreclosures started during the Q1, subprime ARM loans made up 195,000 and prime ARM loans made for 117,000.
• The hike in prime ARM foreclosures exceeded subprime ARM foreclosures with increases of 29,000 and 20,000 respectively over the previous quarter.

Who Takes the Prize?
Though our industry will see some benefits from the FHA’s temporary suspension of the 90-day waiting period for foreclosure sales, is it really going to put a dent in markets where REO inventories are growing while prices hit the pavement? We may never know for sure because REO sales are rarely tracked.

In a recent press release, Brian Montgomery, assistant secretary for the FHA commissioner says, “A glut of foreclosed and abandoned homes harms neighborhoods, frustrates homebuyers and delays a community’s recovery. The action we take today will allow homebuyers to purchase these homes in much greater numbers and ease the excess supply of unsold homes in neighborhoods across the country.”

Too Little, too Late?
So while Federal officials have finally noticed that the effects of the foreclosure epidemic aren’t limited to Wall Street — and the buyers — who really should have known better, some loaded questions remain on the table:

• How far is this temporary FHA policy shift really going to go to get troubled real estate markets moving?
• Will the capital FHA offers buyers raise the bottom for declining markets?
• Will this policy have any impact in getting REO lenders to speed up their response times?
• If the fed needs real estate investors to come in and clean up after the lenders and help them move their REO, equity-free, dead weight, are we still engaging in a “predatory practice” ?

How will this temporary change in FHA policy make a difference in the way you invest in real estate? Please drop me a line and let me know what you think. Also, if you’re interested in learning more about the REI news and developments that affect your business, don’t forget to sign up for my “What’s Working & What’s New” monthly report on GaryBoomershine.com.

NBA star Shaquille O’Neal is shopping a reality TV show based on his plans to invest in Orlando’s burgeoning foreclosure market and “make small profits” by selling the homes back to distressed homeowners with more affordable terms. In some state however, “foreclosure rescue” operations have been scrutinized by lawmakers or banned outright.

The Orlando Sentinel reports that the NBA legend cum real estate investor wants to build his legacy by televising his efforts to help homeowners facing foreclosure in Orlando’s troubled real estate markets in a show to be called “Shaq’s Big Save.” O’Neal’s Attorney, Mark NeJame and Realtor Curtis Cooper arranged for the star center to meet with members of Orlando City Hall this week to float the plans, which may also include an affordable-housing project.

Lawmakers Tackle Foreclosure Rescue Regulation
Florida is not yet among the ranks of states seeking to regulate the activity of real estate investors who profit as foreclosure consultants to distressed homeowners. Last year, the National Conference of State Legislatures (NCSL) reported that a dozen states had taken steps to actively regulate foreclosure transactions. These states include California, Colorado, Georgia, Illinois, Indiana, Maryland, Minnesota, Missouri, Nevada, New Hampshire, New York and Rhode Island.

This year, lawmakers in Oregon and Washington have expanded their regulatory scopes by passing comprehensive laws that regulate lending practices and place restrictions on property transactions as well as contracts between real estate investors and the distressed sellers. Analysts have predicted that regulation trend is likely to accelerate as foreclosure rates continue to rise. This week, the Associated Press reports that foreclosures were up 23 percent in Q1, over Q4 2007.

Shaq Points, Shoots at REI Basket
O’Neal has been dabbling in real estate investment with the fortune he’s amassed through his NBA contracts and product endorsements for some time. In 2006, he created the O’Neal Group, which specializes in commercial and residential development, and housing the $50 million real estate portfolio the athlete has been building throughout his lucrative professional basketball career.

The majority of his development interests to-date have been in Atlanta and New Jersey. In Florida, O’Neal’s holdings include car washes, strip malls, a slice of metro Miami, and a luxury high rise residential tower currently under construction in downtown Miami.

Although O’Neil started his NBA career with the Orlando Magic, he currently plays for the Phoenix Suns. The Orlando Sentinel reports that the star NBA center with a penchant for investing in real estate plans to someday retire to his Florida estate and possibly run for Sheriff of Orange County.