good news for landlords-bad news for RE market

[Rich Weese]

I attended a high income seminar today. The sad part was that the seminar title was Strategic Defaults! The speaker was very high powered attorney in swfl that has been doing these for a couple years. The stats came fast and furious and I tried to compile as many as I could. Where I caught the source, I'm listing it here.      By 2011 the homeownership will drop to 62%, the lowest figure since 1960. USA Today , Aug. 2, 2010.      Think back to the population in 1960 compared to now. This equates to 114 million renters! This is good news for landlords. Vacancy rate nationally has dropped from 8.2% in dec to 6.6% in June. That is a 20% drop in 6 months! At that rate, 0 vacancy factor by 2012, tic. What does that mean?    Now the offsetting news. Only 50% of loans in default are currently being foreclosed on, shadow inventory. What effect will this have?       Hamp program (making home affordable program) Originally 75 billion set aside to "help 7-9 million homeowners (treasury dept march 4, 2009). That figure was reduced to service 3-4 million homeowners. Then that was cut back to 3-4 million will receive OFFERS for a trial modification. ( march 25, 2010 office of special inspector general for the troubled asset relief program SIGTARP)     14 BILLION added to the 75 BILLION to total 89 billion      89 billion set aside to PROCESS apllications for 3-4 million mortgage modifications. According to sigtarp, 1 year later HAMP has modified a grand total of 168,708 loans and has LESS that 1 million in total applications- for 89BILLION!!         Treasury dept says it is disappointed, --yeah , so were the Titantic passengers disappointed.        It gets worse- the Treasury dept has forcast a 40% re-defult and will lead to foreclosure AGAIN! 89 BILLION      This is without considering the strategic defaults. This was high income people, maybe 100 and the speaker is telling them the best way out is to walk away from the big loans. Then the stats kept coming. Since 2008Conforming loans (under 417K) has shown 425% increase defaultsJumbo loans- 625% increaseMillion dollar loans- twice the average in strategic defaults.         Many of the big lenders are instituting a new method to regain their funds. Many qualified borrowers are going out and buying a new home for the lower price, at all time low rate of 4.4% and THEN walking away from the old loan. This is primarily happening in the high priced homes in AZ.NV,CA, and FL.       Lenders are now choosing , where legal to SUE ON THE NOTE, rather than foreclose. It screws the borrower big time. Example: Bought$1,000,000 home w 20% dn $200,000 down $800,000 loanValue drops 30% (conservative- could be 50%)go after $700,000 current value . Lender may foreclose and sell for 700k, then go after deficiency of 100K.                     ORSue to collect the 800 due on the note and let borrower KEEP the property. Gains judgement for 1 million( 800K, plus fees, interest, further loss of asset value, etc etc) Forces sale of home for the 700K. Borrower still on the hook for 300K more, plus all additional costs, fees etc. Borrower that is high income or high asset is screwed.      The balance of seminar was explaining how to do the Strategic foreclosure in such a way to prohibit lender from doing this and forcing lender to do a "Deed in Reduction", or a "Modification in Lieu" . This was pretty cool with examples of both and how borrower, lender and investor all benefitted.       Are these happening in your area? Any BP memebers working on high mortgage defaults?      There seem to be many ways to make returns in this marketplace. There were also statistics showing how long it would take to re-gain even just 10% underwater loans to break even, based on appreciation for area. Avg for the 4 bad states was 5 years. This will lead to thousands of strtegic defaults, imo. I see why many on BP are buying default notes! Good play for those of you. Rich

[Mike McKinzie]

Although we all read about this every day, I talked to an actual homeowner in Rancho Cucamonga, California. She said they were trying to work out a mortgage restructure as they owe $400,000 and the current comps on her street are $115,000 to $130,000. I said to her, "Don't tell me you bought it three years ago." and she said, "I bought it three years ago." For those that don't know, Rancho Cucamonga is in the High Desert of California, on the highway between Los Angeles and Las Vegas. Twenty years ago, you could buy a lot for $500 there.

I have such mixed feelings on this. The borrower signed and agreed to pay the money back. On the other hand, if they can replace their house for 1/4 of what they owe, who can fault them? Shoot, they could buy 4 houses for what they owe on one house, and use the rent from the three to make the four mortgage payments.

But who is really going to turn this market around? That's right, you guessed it, us Real Estate Investors. I have bought five houses so far this year, all cash (well, I did borrow $60,000 to close the last one). BP has a little over 50,000 members, imagine if everyone just bought 2 houses this year. Of course, some will buy none and some will buy 10, 20 or more. So here we go again, us EVIL CAPITALISTS saving the US Economy!!