Foreclosure and Real Estate Blogs

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.

I’ve never written about the mechanics of mortgage fraud, mostly because I didn’t think it was such a good idea to outline how these things work while the markets were allowing it.  Times have changed, lenders are being more cautious, so I think it’s probably safe to talk about without being accused of promoting it.  This isn’t a manual on all the ways mortgage fraud can be accomplished, just one very common way I’ve seen signs of for many years.

The first requirement is for a real estate area that has wide differences in property values, these areas will usually be in the lower spectrum of price for a larger area.  Not quite war zone, but heading in that direction.  Next requirement is an investor, who often has significant real estate knowledge.  Third requirement is for an appraiser who is willing to come up with a value for a property where that value is significantly higher than true area values.  Fourth requirement is for a buyer.  There will often be other players from the lending and title fields, but they aren’t necessarily mandatory.

To explain how it goes, I’ll use simple values that probably aren’t accurate for many areas.
First, in an area where property sales may range from $50,000 to $150,000 , the investor will find and purchase a property at the low end of the spectrum, let’s say $50,000.  They may use a loan to purchase, or the purchase might be structured as a subject-to, or take over payments kind of purchase.
The investor then does a small amount of cosmetic rehab to the property along the lines of cleanup and exterior paint.  The property can then be listed for sale in the $100,000 to $150,000 range.  Now, no buyer with a functioning brain is going to purchase an over-priced crappy house when other true market value houses are available, so the investor needs to bring in his own buyer.
There are people who will allow their name and credit to be used for the purchase of property in exchange for either a one-time cash payment, or the promise of monthly returns from the property.  Those kinds of people are the buyer pool.
So, the buyer comes in with a purchase offer of $125,000, the appraiser states the property is worth that amount even though it’s a $50,000 property with a crappy paint job.  The buyer gets a stated everything loan with no verification of either income or assets and the loan closes.

When the loan has funded and the property now belonging to the “buyer”, the investor has received a gross profit of $75,000.  There would be costs involved in the transaction, but it’s still a tempting amount of money for the unscrupulous.

These type of transactions often end up with the “buyer” not making payments sometime during the first year of the loan.  It might take a little longer, but it’s obvious that there isn’t much point in keeping payments current on a loan that is so much higher than true property value.  With the payments not being made, the property heads to foreclosure.

Who loses?
You do.  You, and everyone else that ever seeks a loan for the purchase of real estate end up paying for the people who cheat the system.  In the example used, it illustrated a lender taking a probable $75,000 loss, or more considering the costs of foreclosure and re-selling the property.  Sure, they are insured for losses, but all the costs they end up incurring will eventually lead to repricing on real property interest rates.  It’s a little more complicated than that because most loans end up as securities on Wall Street, not with one individual lender, but the basic concept is valid.

What’s sad is that this is but one variation of mortgage fraud, I only hope the recent credit tightening will severely limit all the variations.

O.K., I’m on a media bent today.  I just looked through some foreclosure new feeds and saw reports that Vermont foreclosures are up 30% and Florida foreclosures don’t show any sign of letting up.  Duh.

I’ll venture to say that any state/region that saw huge amounts of price appreciation over the past few years is going to have a foreclosure problem for the next few years.  It’s not just a sub-prime mess, there were a ton of people that bought, not wanting to miss out on buying property while prices seemed to always go up.  Did they over-purchase, and is it possible they’ll have problems making future payments?  There’s a good percentage of people that did, and will have problems.

The last time Southern California had a major peak in property price it was right around 1990.  Prices declined from that time until about 1996.  This run-up lasted longer, and was probably more intense due to relaxed lender standards.  So, are we likely to see at least a 6 year decline, or is this going to be just a little blip?  The only thing keeping many real estate markets going right now are the buyers who didn’t buy on the rise and are finding “value” in softer prices.

Two things to keep in mind.  Prices most likely will not reach pre-runup levels.  You’ll know it’s pretty much at the bottom when nobody wants to buy real estate.

I suppose I’ll just have to sigh, and accept that media sources will always seek to find drama in the obvious.

There’s been a lot of activity and discussion about what the recent Ohio foreclosure decisions mean. The controversy appears to have started with a post on the I am facing foreclosure blog. You can read it here. While the presented interpretation sounds pretty dramatic, Calculated Risk had a totally different take on it here.

The short version of the issue boils down to whether a lender can foreclose if they can’t prove they own the note.  The Ohio judge pretty much said lenders need to follow the legal procedures.  That means the lender needs to be able to prove they are owed the money, then prove payments aren’t being made, then they’ll be allowed to foreclose.

Does this transform the world as we know it?  Hardly.  Is it another example of media misinterpretation and publishing for the sake of drama?  That’s my guess.

Took a trip out to Texas about a month ago to look at some property for investment.  That would be long-term hold investment, not a quick buy and flip for quick profit ’cause that doesn’t work so well for mainstream properties in Texas.

Being fairly familiar with high-priced coastal areas, it was quite a shock to see what you can actually get for your money in Texas.  Yeah, you have heat in the summer, and sometimes humidity, and really high property taxes, and your property won’t appreciate like it can in some other places, but:
If you are careful, you can buy and have rents pretty much cover the payments on the property.  Try doing that in Coastal California.

Why Texas instead of Kansas or Oklahoma, or someplace else?
It’s pretty simple.  My wife has family there, and they are willing to manage property, plus keep an eye on area changes and developments.  If you’re going to put money into a non-liquid investment, it’s really not very practical to buy where you can’t keep an eye on your investment.

The absolute biggest thing I miss about urban life is trash pick up.
I can get to the theater if I want to drive for about 45 minutes, restaurants and movies are 15 minutes to half an hour, so I don’t really have much call to miss any of that.  I was never really big on large crowds or the “excitement” that comes from being around lots of people.

Ah, but trash pick up.  Sigh.

I have some really nice trash cans, real heavy duty with tightly closing tops.  They stay really clean because I line them with the big heavy duty contractor trash bags from Costco.  Here’s the part that sucks.  I get to haul those bags, full of trash, out to the truck, grunt it into the back, then drive about three miles to a transfer station where I get to grunt the trash bags into the big dumpster chute.  It was so much easier, and quicker, when all I had to do was roll the trash cans out to the side of the curb.

Funny, the things you miss.