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.

California foreclosures and the mortgage meltdown have been making international news headlines for some time. But this month, news  from the Golden State went from bad, to the Twilight Zone.

Much like the classic TV show, first made popular in the 1950s due in large part to host Rod Serling’s melodramatic gravitas, California’s housing market begs for a prelude to prepare readers for the truly bizarre. As Serling said: “There is a fifth dimension beyond that which is known to man,” He might as well been introducing late-breaking developments in California’s foreclosure crisis.

Here are the five most most startling, weird and ugly foreclosure stories to come out of California so far this month.

1. California REO Foreclosures Selling like Ipods
   This month, the LA Times reported that in April, California home auctions sold nearly 23,000 foreclosure properties at courthouses throughout the state. That’s is a 44 percent jump from the number of REO auctions reported for the state in March. That’s 1,000 homes sold at auction each business day for an entire month.
2. IRS Tax Delinquency, Lies and the Lawmaker
   Although she denied it earlier this week in a written statement, public records show that California Congresswoman Laura Richardson’s Sacramento house was sold via foreclosure auction on May 7. When she bought the 1,600 square-foot home in 2007, she paid more than $535,000. By the time it sold at auction, she owed $600,000 in unpaid loans and fees, including nearly $9,000 in property taxes, reports Capitol Weekly.
3. Countrywide Exec’s Email Debacle
   When an e-mail sent by a distressed homeowner inadvertently landed in his in box, Countrywide Financial Chairman Angelo Mozilo mistook the “reply” button for the “forward” button and sent his caustic response directly to the sender. The LA Times reports that not only was he unsympathetic in his response, he characterized the online foreclosure counseling service that encouraged the homeowner to contact his lender as “unbelievable” and “disgusting.” Mozilo has been under fire for cashing out while Countrywide, and the rest of the mortgage industry was tanking. In 2006, Mozilo was paid nearly $50 million in compensation; between 2006 and 2007, he cashed in stock options then valued at $140 million.
4. Never Neverland Again?
   Mid-month, entertainer Michael Jackson averted the scheduled foreclosure sale of his 2,700 acre Encino Neverland Ranch when his $23.5 million loan was purchased by real estate investment giant Colony Capital, according to Reuters.com.
5. REO Lender Takes the Bat to Canseco’s Portfolio
   At the beginning of this month, news got out that baseball great Jose Canseco let his 7,300 square-foot Encino home slide into foreclosure. He bought it in 2005 for $2.8 million, and when foreclosure struck, the property already had an IRS lien from a judgement levied against Canseco for starting a fight that leveled a Miami night club several years ago. This week, the Chicago Tribune reported that Canseco, who blames his two divorces for his financial woes, intends to generate wealth in his new career as a celebrity boxer.