Foreclosure and Real Estate Blogs

Well, tomorrow’s the big day.  The Fed is going to be cutting the federal funds rate, the only question seems to be will they drop .50%, .75% or possibly a full percentage point.  These are certainly interesting times for rate watchers.  The Federal funds rate doesn’t have much impact on mortgage rates, but it does have impact on other parts of the economy and that’s where the Fed wants to provide some stimulation.

What happens, though, when the Fed exhausts it’s ability to drop rates to provide economic stimulus?  A full percentage point drop will put the federal funds rate at 2% and according to the government, we aren’t even in a recession.  If this non-recessionary economy continues to worsen, that leaves the Fed with only 2% for future adjustments.  Is that going to be enough?  Who knows.

A lot of the U.S. economy is driven by consumer spending.  With the home equity ATM closed, it’s highly unlikely the U.S. economy will be able to spring back quickly no matter what changes the Fed brings about.  2010 is a good possibility for the end of this non-recession, but I also wouldn’t be surprised if it went so long as 2011 or 2012.  Just make sure anything you buy either cash flows or is at a very significant discount or you’re willing to keep it for awhile.

“The mounting crisis has forced Mr. Bernanke, a former professor of economics, to discard the sanguine view of the nation’s economic health that he expressed last summer. He has also abandoned his skepticism about the need to calm financial markets and set aside his concerns about the “moral hazard” of bailing out big financial institutions.”
From the NY Times

Why is gold rising in price?  Gold is a classic hedge against inflation.  Why are people concerned about inflation?  Because the Fed keeps cutting interest rates to stave off recession.  Why is there a threat of recession?  Because the Fed allowed Wall Street to binge on crappy mortgage lending practices.

The party’s over, so now who gets to support the big Wall Street failures?  The taxpayers.

I’ve seen this published in several places, it seems like a growing trend due to the increase in distressed homeowners.

“Many homeowners facing financial difficulties used to look to home equity as a resource to cover shortfalls. But with that option off the table for many, increasing numbers of people are considering tapping into a second large asset — retirement savings.”
From SeattlePI.com

There’s a saying about the inadvisability of throwing good money after bad, it’s pretty appropriate in this situation.  401k’s are a retirement vehicle, and there are significant penalties for early withdrawals, even in a hardship situation.  You can often borrow against the 401k, but should you?
If a foreclosure process is imminent, the borrower really needs to take a strong look at their finances, the property and their loan(s), and the real estate market in their area.  If there isn’t enough money coming into the household to be able to make the payments, foreclosure is inevitable.  If a job loss caused the default, is the expectation of new employment realistic, or is it just hope?  The use of retirement money to buy a few more months probably isn’t the wisest choice in this type of situation.  On the other hand, if there was a financial setback that has since been resolved, then the thing to do is talk to the lender about a forbearance plan.  It’s a much cheaper solution than using retirements funds.

If there’s been a financial setback, and the local real estate market has dropped in value, there is no point in using retirement funds to stave off foreclosure.  It will take years for many markets to recover some of the losses, buying a few months more time with 401k funds probably won’t get enough time to allow for market recovery.

Hard choices, but retirement funds should be left for retirement, using them to delay foreclosure for some time period really does fit the “good money after bad” concept you should be avoiding.

“Mortgage delinquency and foreclosure rates have increased substantially over the past year and a half,” Mr. Bernanke said during a speech in Washington. “Behind these disturbing statistics are families facing personal and financial hardship and neighborhoods that may be destabilized by clusters of foreclosures.”
From the NY Times

Well, duh.

Of more interest is the comment that 1.5 million homes entered foreclosure last year and there are another 1.5 million subprime loans that will have their rates reset this year.  There’s a lot more pain to come, and not just for homeowners.  Bear Stearns, one of the big players in the subprime mortgage market is now looking for a bailout from JPMorgan.

When this is all over, and I guarantee the Fed won’t be the architect of it’s resolution, many homeowners might be battered, but they’ll carry on.  Some of the big lenders that facilitated the credit bubble won’t be carrying on, they’ll be absorbed or shut down, which is the way things should be.

“The Commerce Department said yesterday that retail sales fell 0.6% in February; sales excluding the volatile auto and auto-parts categories fell 0.2%. The declines reflect a sharp slowdown in consumer spending, which accounts for more than 70% of U.S. economic activity, as Americans grapple with high gasoline and food costs and declines in home values and other asset prices.”
From the Wall St. Journal

Interesting points from the article include some pretty pessimistic viewpoints from the surveyed economists with a majority believing federal funds will be used to help alleviate an unsteady economy.  Some elements of humor include one economist stating that these economic issues came to be under Ben Bernanke’s watch.  Bernanke might have to take the heat, but that’s just because Greenspan retired knowing what was coming.

The Anderson Center for Economic Research is predicting recession for 2008 in both California and the U.S.

” Much of the recent increase in consumer spending has been financed by households cashing out a portion of their home equity gains by refinancing their loans. But total home equity cashed out is estimated to decline by almost $60 billion in 2007.”

But that’s not all.

“We are projecting an additional decline of $130 billion in 2008. The resulting negative hit on consumer spending will be considerable, especially when it is coupled with the impact of higher energy costs on reducing spending.”

The full report should be a “must read” for anyone considering purchasing a home, either for use as a personal residence or as an investment property. The days of just buy it and you’ll make money are over, the fundamentals are critical now and you have to consider the very real prospect of losing value.

You can find the press release of the report here.

I’ve been looking at some properties and found a couple of bank owned houses on the same street, separated by one house in between them.  In itself, the proximity of the two is kind of alarming, but the bigger question is how many other homes in that same area will end up going through the same process.  I’ve already talked about home pricing and affordability, these samples are just kind of anecdotal references to a process repeating itself in many of the “boom” areas.

Property #1
3 bedroom 2.5 bath 2949 square feet sold on the open market for $809,000 in May, 2005
HSBC took the property back for $824,240 in August, 2007
Currently listed for sale at $759,900 with no takers yet.

Property #2
3 bedroom 2 bath 1836 square feet sold on the open market for $850,000 in January, 2006
Argent took the property back for $712,720 in August, 2007 (probable drop in opening bid)
Currently listed for sale at $725,000 with no takers yet.

Housing prices in many areas are now a moving target, and that target is on a downward trend.

Patrick.net has a strong argument about why there should not be a governmental bailout of the borrowers and subprime lenders who got those borrowers into their overpriced homes.

I’m not going to duplicate their thoughts, but visit the site, read the article AND contact your representatives and let them know how you feel on this issue.

There’s been a lot written about home loans and securities lately with the emphasis on increasing foreclosure rates and the losses incurred by the holders of sub-prime securities.  That begs the question “What the hell is Fannie Mae and Freddie Mac, and why do I care?”

U.S. residential lending was far different in the fifties, rather than what we’ve got today.  Local banks, savings and loans, thrifts were all sources of financing, and although the loan terms weren’t too bad, it did require a 20% down payment to purchase a home.  Housing, and residential construction were subject to boom and bust periods often influenced by the availability of credit.

Fannie Mae was restructured in 1968 as a federally chartered corporation, Freddie Mac was created in 1970 to “compete” with Fannie Mae.  Both corporations are private, but are government sponsored and have lending advantages that aren’t available to non-sponsored lenders.  The explanation for what these organizations do isn’t hugely simple, but it is understandable.  They create CMOs or Collateralized Mortgage Obligations which entails combining a group of mortgages into a “pool”, then separating the future payments into “strips” with different risks and maturity dates.  Those strips are then sold as securities.

Many mortgage loans originated in recent times won’t be owned by a “lender”, they are originated to Fannie Mae or Freddie Mac guidelines, then sold into the secondary market.  The entity servicing(collecting payments) the loan may, or may not have an interest in the loan.

The use of CMOs in the past certainly helped stabilize housing markets and increased overall homeownership rates.  Where things went bad, IMHO, was when the demand for high returns led to the creation of CMOs for pools based on artificial or non-existent original loan documentation.  It was musical chairs with ever increasingly easy credit, the big problem being there were an awful lot of players and not too many chairs.

For no readily apparent reason, I’ve been thinking about Ray Kroc today. The story, as I remember it, had Ray Kroc living a fairly unremarkable life selling paper products and milkshake mixing machines up until his 52nd birthday, or so. He then saw something that changed his, and millions of American’s lives. He saw, and understood the implications of the local success enjoyed by the MacDonald brothers who were running a small local restaurant.

He came to an agreement with the MacDonald brothers, took their basic idea and expanded it nationally to become the fast-food chain know as McDonald’s.

The growth, and profitability of McDonald’s wasn’t a smooth instant success story. Individual stores fared well, but the corporation didn’t receive enough revenue to be truly called profitable. Where did the profits kick in?

When McDonald’s corporation started purchasing and leasing land to their franchise owners. Leverage, which is one of the strongest benefits of owning real estate, was one of the major reasons McDonald’s corporation switched from an “average” company to an American success story.

If you don’t know the story of Ray Kroc, I’d highly recommend searching his name on a search engine and reading some of the information about him.  Fascinating guy, I think everyone can learn something from what he accomplished.