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.

Amid the U.S. foreclosure epidemic, Habitat for Humanity has been capitalizing on the low prices of real estate owned properties (REO), and foreclosed properties to advance its mission to provide affordable housing in communities throughout the nation. Sound ironic? Maybe so, but it’s also a practical strategy for foreclosure-blighted areas to get their homes occupied as soon as possible.

By rehabbing these low-income properties, the non-profit is helping build stronger communities and property values in many of the real estate markets that need it most. They’re also helping to stave off some of the dangers that come with properties that seem to be abandoned in the long term.

When Builders and REO Lenders Walk Away
The Associated Press reports that an increasing number of Habitat for Humanity chapters have buying REO and foreclosed properties at bargain basement prices, organizing legions of volunteers for massive rehabbing projects and then selling the homes at affordable prices to families in need.

When rehabbing isn’t a practical option (and many of us know that sometimes it isn’t) the houses are torn down to make way for new dwellings. In some real estate markets, Habitat for Humanity is even buying large subdivision tracts left over from the real estate bubble burst. Many developers are simply walking away from developments they can’t afford to complete, Habitat officials say.

Although the circumstances that have enabled Habitat for Humanity to acquire massive amounts of U.S. real estate are lamentable, placing low-income families into affordable housing is a better use of existing resources than allowing properties to remain vacant or go to real estate investors. Habitat officials warn that vacant homes can drive up crime and reduce nearby property values.

REO, Foreclosed Homes and Neighborhood Blight
Not only are vacant properties an invitation for crime, In many U.S. housing markets, the untended, vacant properties have led to health hazards and neighborhood blight. Unkempt swimming pools have provided prime breeding grounds for the West Nile Virus. Properties left dirty or unsecure also are vulnerable to vermin that spread disease such as: rats, mice, roaches and others.

The extent to which Habitat for Humanity affiliates participate in local foreclosure and REO investing depends to some extent on how much money they have to spend. Here are some project highlights:

Habitat for Humanity Projects in Four Metro Markets:

1. In Fort Worth, Texas, the local Habitat chapter is negotiating to buy part of a 160-lot subdivision
   that a developer seems to have abandoned. If their negotiations go according to plan, they’ll develop 50 of the remaining 100 vacant lots in the area. Fort Worth Habitat officials say that prices for comparable lots has dropped 30 percent to 40 percent since the height of the real estate boom.
2. In Dallas,Texas, another Habitat affiliate has picked up about 150 lots for half of the original price. Developers in the city’s south end are abandoning inexpensive lots and costly construction projects in favor of greener looking pastures in the city’s north end leaving many real estate investment opportunities wide open, officials say.
3. The Habitat affiliate in Phoenix, Ariz., is wrapping up negotiations to complete a 20-home development abandoned by a company that went bankrupt and couldn’t complete its development. In addition, Habitat officials say they’re working deals on 14 metro-area unfinished lots for less than half of their original list price.
4. In Milwaukee, Wisc., the city is taking action against the ill effects of foreclosure in its metro communities. The city is buying multiple condo units in one large complex with a high concentration of foreclosures, and then selling them to Habitat for about $5,000 each. When Habitat for Humanity volunteer rehabs on the units are complete, they’ll be sold to clients for about $25,000.

As a real estate investor, what do you think of the city intervening with foreclosed and REO properties and working with a third party such as the non-profit Habitat for Humanity? Do you see advantages or disadvantages from yor position as a real estate investor?

Despite ongoing troubles in the U.S. housing market, some areas post green lights for investors looking for relatively high and fast price gains in the next year. According to Money magazine, these markets have what it takes to make for solid real estate investments (REI). (Additional data provided by Wikipedia and the U.S. Census Bureau.)

1. McAllen, Texas:

• U.S. Census data for 2003 estimated the city’s population to be 116,500.
• 12-month forecast: 4 percent
• Median home price: $109,000
• One-year price change: 2.1 percent
• Five-year price change: 23.3 percent
• Change in foreclosure rate: 23 percent

2. Rochester, N.Y.

• U.S. Census data for 2003 estimated the city’s population to be 216,000.
• 12-month forecast: 2.7 percent
• Median home price: $121,000
• One year price change: 3.4 percent
• Five year price change: 20.1 percent
• Change in foreclosure rate: 5 percent

3. Birmingham, Ala.:

• U.S. Census data for 2003 estimated the city’s population to be 236,600.
• 12-month forecast: 2.7 percent
• Median home price: $156,000
• One year price change: 2.9 percent
• Five year price change: 29.4 percent
• Change in foreclosure rate: 20 percent

4. Syracuse, N.Y.:

• U.S. Census data for 2003 estimated the city’s population to be 144,000.
• 12-month forecast: 2.6 percent
• Median home price: $126,000
• One year price change: 0.8 percent
• Five year price change: 29.5 percent
• Change in foreclosure rate: 27 percent

5. Buffalo and Niagara Falls, N.Y.:

• U.S. Census data for 2003 estimated Buffalo’s population to be 285,000; Niagara Falls to be 54,000.
• 12-month forecast: 2.4 percent
• Median home price: $105,000
• One year price change: 1.6 percent
• Five year price change: 24.5 percent
• Change in foreclosure rate: 14 percent

6. New Orleans, La.:

• U.S. Census data for 2003 estimated the population to be 469,000.
• 12-month forecast: 2.2 percent
• Median home price: $158,000
• One year price change: 1 percent
• Five year price change: 43.7 percent
• Change in foreclosure rate: 49 percent

7. Scranton, Pa.:

• U.S. Census data for 2003 estimated the population to be 74,300.
• 12-month forecast: 2.2 percent
• Median home price: $128,000
• One year price change: 7.2 percent
• Five year price change: 41.1 percent
• Change in foreclosure rate: 8 percent

8. Grand Rapids, Mich.:

• U.S. Census data for 2003 estimated the population to be 195,600.
• 12-month forecast: 1.9 percent
• Median home price: $124,000
• One year price change: -3 percent
• Five year price change: 8.3 percent
• Change in foreclosure rate: 37 percent

9. Baton Rouge, La.:

• U.S. Census data for 2003 estimated the population to be 225,100.
• 12-month forecast: 1.9 percent
• Median home price: $170,000
• One year price change: 5.7 percent
• Five year price change: 38.3 percent
• Change in foreclosure rate: 14 percent

10. El Paso, Texas:

• U.S. Census data for 2003 estimated the population to be 584,100.
• 12-month forecast: 1.8 percent
• Median home price: $134,000
• One year price change: 6.9 percent
• Five year price change: 51.9 percent
• Change in foreclosure rate: 32 percent