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.

Americans are clearly divided on whether homeowners with distressed properties should receive government-targeted aid to help them keep their houses, as are their elected representatives in Congress.

According to a recent CNNMoney.com poll, only half of Americans surveyed believe that help should be extended to struggling homeowners. These results are derived from phone interviews with 1,008 adults conducted at the end of April. When the same survey was taken in December, 51 percent of survey participants favored special assistance, while 46 percent did not.

The split in popular opinion on the issue also is reflected in the U.S. Congress. Last week, the House of Representatives fiercely debated legislation that would provide federal backing for some at-risk loans and cut the principal owed on some mortgages. The bill passed through the House last week on a 266-154 vote.

The proposed legislation would allow the Federal Housing Administration (FHA) insure up to $300 billion in new loans over four years if lenders agree to reduce mortgage principals. In order to qualify however, lenders would be required to drop the debt to no more than 85 percent of a home’s appraised value. Under the bill, sponsored by House Financial Services Chairman Barney Frank, if the FHA-refinanced loans went into default, the FHA would pay the lender the remaining principal owed.

Critics allege that the legislation is unfair to those who didn’t bite off more debt than their finances could chew, and say it is an inappropriate use of the FHA to bail out lenders and homeowners — all of whom should take responsibility for their business transactions.

Still, due to growing support for the measure in Congress, many expect the legislation to survive bipartisan scrutiny — and predict the bill will gain support from legislators who represent states that have been pummeled by the credit crunch, mortgage meltdown and on-going housing market woes. The White House already has threatened to veto the legislation.

Federal Reserve Chairman Ben Bernanke has announced his approval of a new plan by the U.S. Congress to help stall the foreclosure rate for homeowners now drowning in debt. The legislation was drafted to help distressed homeowners, and is now snaking its way through the House of Representatives. House Financial Services Committee Chairman Barney Frank of Mass is the bill’s author and original sponsor.

If enacted, the legislation would allow the Federal Housing Administration (FHA) to back as much as $300 billion in refinanced loans for homeowners facing foreclosure. Critics say that the legislation would unfairly punish homeowners who didn’t overextend their finances. Bernanke says that finding ways to avoid preventable foreclosures currently makes for sound public policy. And his support may help Frank find Congressional support for the measure.

The Fed chairman says that there is a strong economic case for trying to avoid the price drops and other economic hardships imposed by the booming foreclosure rate. The costs of foreclosure, he says, may extend well beyond the borrower and the lender. He also has observed that clusters of foreclosures can destabilize communities, reduce the property values of nearby homes, and lower municipal tax revenues. Foreclosures, as we’ve seen, also can drive house prices lower.

MarketWatch reports that one tactic favored by the White House is to reform the FHA and allow it it to increase the scale of its lending. Another approach would be to give stronger powers to the federal government to oversee the affairs of Fannie Mae and Freddie Mac. Bernanke supports these measures and has said that Fannie Mae and Freddie Mac should be used to mitigate the damage of the housing market downturn, and be allowed to do so in a safe and sound manner.

Last week the Fed cut interest rates another quarter of one percentage point to 2 percent.