Foreclosure and Real Estate Blogs

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.

This morning I woke up at my usual 4:30 A.M. , laid there for a bit and thought about the whole early rising thing.  I don’t always get up at that time, but my neighbors help make sure that I’m at least awake.  There are 6 houses in our little grouping of homes, 2 are retirees, 2 are self-employed, 1 is a bus driver and 1 is a Realtor.

The retirement crowd always seems to be getting up at that time, lights are going on but they aren’t making too much noise.  1 of the self-employed often leaves at that time so I can hear his car start, the bus driver is always up, but he doesn’t leave till a little later in the morning.  The Realtor is the only one who never seems to be up before 6:30 or so.

The biggest plus of getting up fairly early in the morning is the vast amount of things you can get done, assuming of course that you aren’t going to be using power tools to accomplish your tasks.  Nothing seems to piss off neighbors more than firing up a circular saw at 5:00 in the morning.

Using a computer, I can put in 8 hours of work by 2:00 P.M. and still have a significant amount of daylight left for anything else I may want to do.  I used the do the same thing working construction in my early twenties, we’d start at 6:00 and close the day out at 3:30 or 4:00.

So what do you give up when you go to bed earlier so you can rise earlier?  Television?  Reading?  Socializing?
Books don’t care when you read them, digital recorders provide television when you want it, so really the only thing that might be affected is getting together with friends.  It seems that most of our friends also follow a similar pattern of early rising, so that doesn’t affect us much, your mileage may vary.

I believe it was Benjamin Franklin who coined the phrase about early rising and although I didn’t really plan my early rising, I do sometimes feel wiser. 

Fed Chairman Ben Bernanke testified in Feb., 2006 that:

“For example, a number of indicators point to a slowing in the housing market. Some cooling of the housing market is to be expected, and would not be inconsistent with continued solid growth of overall economic activity.
However, given the substantial gains in house prices and the high levels of home construction activity over the past several years, prices and construction could decelerate more rapidly than currently seems likely.
Slower growth in home equity in turn might lead households to boost their saving and trim their spending relative to current income by more than is now anticipated.”

That was a reasonable prediction. The “cooling of the housing market” part has pretty much happened in all the hot markets, but I haven’t seen much regarding the “households to boost their saving and trim their spending relative to current income” part.  What does that mean to me?  A predicted drop in consumer spending which will most likely lead to a rise in the unemployment rate.  It’s fairly obvious that unemployment will rise in construction, lending and real estate related industries, but when consumer spending declines, there isn’t as much demand for those goods and services that fly off the shelf during the “happy happy” times.

So here’s a prediction for how the real estate markets are going to move.  Gradual decline through 2010 for any area that has seen double digit valuation gains.  Why?  The crappy loans given to anyone breathing don’t finish the majority of their resets until 2010.  After 2010?  Probably more decline.  Housing prices move inversely to unemployment rates.  When unemployment is really low, housing prices tend to move up.  When unemployment goes up, housing prices tend to move downward.

I don’t know that there’s ever been a housing induced recession, but it looks like we’re going to get to experience one.  The good news, of course, is that those people who do not live in wildly inflated real estate markets probably won’t see too much of a decline.  Interesting times, indeed.

Everyone’s aware of the issues with California’s housing markets, today’s question is whether current prices make sense given a more realistic loan underwriting requirement. Conventional loan underwriting requires a home loan payment, including property tax and hazard insurance, to be less than 33% of a borrower’s pre-tax income. That’s not cast in stone, but it’s a good number for determining housing affordability.

Let’s take a house listed for sale at $600,000. Yes, some areas will be lower priced, some will be higher priced, adjust the numbers to reflect your local area.
$600,000 Purchase Price
-$60,000 Down Payment (10% down based on the $600,000 purchase price)
$540,000 Loan Amount

What will the payments look like?
$3,413 Principal and Interest ($540,000 loan @ 6.5% for 30 years)
$ 625 Property Tax ( 1.25% of $600,000/12 ) - might be significantly higher
$ 250 Hazard Insurance - Probably a bit on the high side, this will vary
Total Monthly Payment - $4,288 - Does not include the possibility/probability of PMI or Association dues

What income is required to purchase this home affordably?
$12,994 a month, or $155,928 a year.

2006 California median income for a 4 person family was $74,801. Half of the families were making more than that number, half were making less. Census Median Income
Now, we can use the argument that some California counties are affluent, and some California counties are more rural and less affluent. That’s reasonable. Orange County had a 2004 median household income of $58,605. Marin County had a 2004 median household income of $67,731.  Maybe there are more affluent counties?

There’s also the argument that only people earning significantly more than the median average were buying homes over the past few years.  It sounds reasonable, but if the qualifying threshold is roughly three times the median income, the buyer pool becomes really, really small.  The most likely answer to why prices reached levels unaffordable for many lies with the Option Arm loans with qualifying based on teaser rates or stated income.

It allowed many people to purchase homes, but will it allow them to keep those homes?

Msnbc has an article about Increasing Your Home’s Value.
Since some parts of the U.S. are now having problems retaining property value, I thought this might be a good/interesting article that people might find helpful.
Tip 1: Maintenance Pays Off-big time
I can’t argue with that concept, a well maintained house will always outsell the falling apart POS down the street. That is, of course, assuming that the prices are reasonable aligned between the two properties.
Tip 2: Keep up with the Joneses.
The concept is to keep your property, and it’s improvements, in line with the area. Buyer expectations in a given area will pretty much match the improvements in an area. The provided example of granite countertops is accurate, in an area where granite is common, you probably shouldn’t install canary yellow Formica on your counters.
Tip 3: Size does matter.
“Creating living space within the confines of the existing structure”? I can see the conversion of a basement into a family room, but adding a bedroom in an attic? I suppose it might work, but I can’t see that kind of add-on helping value much. Maybe if I was living some kind of horror movie life and had some scuttling relative that needed to be locked in the attic.
Tip 4: Some rooms are better than others.
So the feeling is bedrooms and bathrooms are important because they indicate how many people can comfortably live in a house. Well, IMHO, two bedroom one bath homes are kind of obsolete unless the buyer is looking for a “cottage” type home. Three bedroom two bath homes are fairly common in many areas, four and five bedroom homes are kind of standard in a lot of new construction. Is a five bedroom home worth a lot more if it’s in an area of three bedroom homes? NO. It’s worth something more, but overbuilt properties usually won’t recover the cost incurred in the overbuild.
Tip 5: It’s all about balance.
Now the writer talks about improvements and making sure you’ll be able to recover your expenditure.

Overall, it’s not a bad article, but it probably should have stopped at Tip #2. Improving a home’s value inexpensively can be done by making sure everything is functional and maintained first, then upgrading portions of the house as time and money allows. Bathrooms, kitchens and flooring can be expensive upgrades, plan and save for those upgrades. You can start with:
Interior Paint- Fix all the holes in walls, take your time, get good coverage and clean edges
Electrical Outlets and Switches - Uniform and new throughout the house
Doors and Hardware - Change out all interior doors and hardware, think lever sets instead of knobs
Lighting - If the house has ceiling mounted lights, change them out.
Window Coverings - Personal choice, think neutral colors so room colors can be changed later on
These improvements can be done fairly inexpensively and will give your home a “fresh” appearance which can help your state of mind while waiting to proceed with the more expensive improvements.

The recent changes in how lenders underwrite loans became very obvious to me over the past few days.  We were looking at an SFR to use as income property, but trying to use 10% as a down payment rather than the historical “norm” of 25-30%, we also wanted to go with stated income rather than full documentation.  Surprise, surprise, the loans available half a year ago to anyone with a pulse aren’t currently available.  I have one broker pushing a 90% loan that needs to be a full doc through Chase, another broker wants to do a 75/15/10 using stated income.

So why not take the 75/15/10 ?  I was sent a preliminary HUD-1 that showed a roughly 2% Yield Spread Premium on top of the quoted 1% origination fee.  For those not in the lending business, a YSP is an amount paid from the lender to the originating broker for delivering a loan with a higher interest rate than the best available rates.
In other words, I was being charged 3% for a loan that really wasn’t too complicated.  We have the credit history, funds in the bank, income to carry any potential problems, what’s so difficult about the loan decision?

If anyone believes the issues created by the subprime lending meltdown aren’t bleeding into conventional lending, I’ve got news for them, the bleed-over is real, and I think it’s going to get a lot more significant over the next year or so.  At a guess, I think we might be looking at the rebirth of the creative real estate financing techniques.