Transactional Funding

Colorado Short Sale Flips - Holding Period Required

The rules have changed for real estate investors wishing to flip short sales in Colorado. There is now a material difference for those flipping short sale properties regarding disclosure requirements to all parties; or as an option, a required holding period for the investor. The Colorado Legislature’s House Bill 10-1133, known as the Foreclosure Act, became effective January 1, 2011. You can click HERE to access the full 10-1133 Bill. Below is a summary of disclosure requirements for investors looking to flip Short Sales within 14 days (and also a solution) where A= Seller, B= Investor, and C= Ultimate Buyer:

- A to B Disclosure: Investors must disclose any knowledge of a near term sale of the Property to the Lender accepting the short sale and the homeowner (“Seller”) within one business day of such knowledge. The Investor must also disclose the subsequent sale price and profit margin of the property to the Seller.

- B to C Disclosure: Investors must disclose the purchase price for the property and the profit margin to the C Buyer (“Ultimate Buyer”) and Ultimate Buyer’s lender.

To summarize, if an investor in a Colorado short sale property is going to buy and flip it within 14 days the investor is legally obligated to disclose his or her profit to the Seller, the Ultimate Buyer, and the Ultimate Buyer’s lender.

- The Solution:

Investor Funding Alternatives has an Extended Term Transactional Funding product to assist you with this new Legislation in Colorado as well as other “seasoning” or “holding” requirements nationwide, such as: Bank of America short sale approvals requiring a 30 day hold before transferring title, FHA mortgages for the Ultimate Buyer, lenders for the Ultimate Buyer requiring B to be in title before closing, and so on. This funding product is for transactions where an investor is contracted to acquire short sale or REO real property and is also under contract to sell the property to another buyer with closing to occur within 35 days. This new Extended Term Transactional Funding is less expensive than traditional hard money and funds up to 100% of the initial purchase price.

One Foreclosed Home Every 90 Seconds

For the first quarter of 2010 FNMA and Freddie Mac took possession of a foreclosed home every 90 seconds and held inventory of foreclosed properties of 163,828 homes. Costs to taxpayers so far totals $146 Billion and is estimated by the Office of Budget Management to reach as high as $389 Billion.

Here is a link to the full article: http://tinyurl.com/23ps25j

With this much inventory and foreclosure numbers continuing to climb it is difficult to understand the reluctance of both FNMA and Freddie Mac to sell to investors. Being more reasonable with short sale offers would seem to make sense to all parties involved and to the housing market. Placing restrictions on resell time frames simply adds cost to the investor which is likely to be passed on to the ultimate buyer.

Housing Recovery? One Expert Says No

Dean Baker called the housing bubble when he published published “The Run-up in Home Prices: Is It Real or Is It Another Bubble?” in 2002. In the attached article and video he predicts that the end of government support programs will reduce the number of buyers for the balance of 2010. This is an interesting and telling interview with CNN News. You can view the video at this link: http://tinyurl.com/23k9bdm

Mr Baker argues that government programs that have come to an end have propped up the market and are unlikely be extended, resulting in fewer buyers. The First Time Buyers Tax Credit ended in November and was extended to the end of April. The Treasury Department purchased $1.25 Trillion of mortgage backed securities keeping mortgage rates artificially low. Mr. Baker predicts niether program will be continued and that mortgage rates will rise to 5.50 - 6.00% by the end of this year. Additionally, FHA to some extent has replaced the subprime mortgage market; but is being forced to curtail some of its lending due to falling below its minimum capital requirements. He ultimately argues that the government propping up housing prices does not make sense.

What do you think?

Ted Akers is the Managing Member of Investor Funding Alternatives which funds investor purchases for back-to-back transactions at www.InvestorFundingSite.com

11.3 Million (25%) of all Mortgages are Underwater

Cnn.Money.com and several others are reporting that according to FirstAmerican CoreLogic more than 11.3 million homeowners, almost 25% of all U.S. mortgages, owe more on their mortgage than their home is now worth. That is up from 23% and 10.7 million borrowers from three months earlier. An equally critical number is that over 10% of all mortgagees owe 25% more than their home is worth. "The rise in negative equity is closely tied to increases in pre-foreclosure activity," CoreLogic said. Once a homeowner owes 25% more than the house is worth, foreclosure rates rise sharply.

The number of underwater mortgages increased by about 620,000 from the third quarter, the firm said. Another 2.3 million mortgages had less than 5% equity in their home, which could be wiped out if home prices fall further. "Negative equity is a significant drag on both the housing market and on economic growth," said Mark Fleming, chief economist with First American CoreLogic. "It is driving foreclosures and decreasing mobility for millions of homeowners."

Underwater mortgages are concentrated in few states. In Nevada, 70% of mortgages were underwater followed by Arizona (51%), Florida (48%), Michigan (39%) and California (35%).

These numbers, along with close to 10% delinquency rates with payments over 60 days late for both FHA and Jumbo loans, point to a slow recovery. It does however highlight likely upcoming opportunities for Short Sale and REO investors.

Should Investors Focus on Short Sales?

YES, because they will continue to be a VERY significant part of real estate investing for at least two years. It is all in the numbers, and “the numbers do not lie”.

Real estate website Zillow.com says one of every five U.S. home owners owe more on their mortgage than their home was worth in the fourth quarter. YES, One out of every Five – or 20% of all mortgages have some potential as short sale candidates or to enter the foreclosure process. U.S. home values declined again in the fourth quarter, as the Zillow Home Value Index fell 5% year-over-year. It was the 12th consecutive quarter of year-over-year declines. "The prevalence of markets in or near a double-dip situation shows that we are not yet at the bottom, in terms of home values," according to Stan Humphries, chief economist for Zillow.

The Federal Housing Administration (FHA) reports that the percentage of loans it insures which are at least 90 days past due hit 9.12% at the end of 2009. This is up from 6.82% one year earlier – a dramatic 34% increase. For those not familiar, a 9-10% delinquency rate is of significant concern. FHA currently insures about 30 percent of all new loans for home purchases. AND, FHA just suspended for one year their 90 day no-flip rule; thus allowing Short Sale or REO investors to sell very quickly to an FHA buyer without using Hard Money.

According to DSNews delinquencies on prime Jumbo loans continue to climb. Fitch Ratings Service also predicts they could reach 10 percent as early as next month, as serious delinquencies rose for the 32nd consecutive month. According to Fitch prime Jumbos at least 60 days past due swelled to 9.6 percent in January, up from 9.2 percent in December 2009. The company says delinquencies accelerated in 2009, nearly tripling over the course of the year. States with the highest volume of prime jumbo loans outstanding are California, New York, Florida, Virginia, and New Jersey and comprise approximately two-thirds of the $381 billion Jumbo loan market. So, 10% of $381 Billion equals $38 Billion in Jumbo loans in trouble. Florida saw the biggest monthly jump of these states. It holds only 6 percent of the market share, but now has the highest serious delinquency rate at 16.6 percent.

However, in my opinion of primary focus to investors and market values is the approximately $2 Billion per month of Option ARM’s scheduled to “recast” beginning in March 2010 and which will climb to $6 Billion in the month of October 2010. From there “recasts” will gradually climb to a peak of approximately $13 Billion in October 2011 and will taper down to zero by September 2012. A “recast” of an Option ARM is similar to a “reset” of a traditional ARM. However, a major difference is that the likelihood of an Option ARM mortgage being underwater compared to actual value versus a traditional ARM is significantly higher. Moodys has previously reported that 93% of Option ARM homeowners have chosen to make a minimum payment under their “four payment options” which adds principal to their mortgage balance every month, making a potential refinance very unlikely. Moodys has also previously reported that the average payment increase at the time of a recast is 63%. How many homeowners paying $1,000 per month can absorb a new payment of $1,630? In my opinion Option ARM mortgages present significant profit potential for short sale investors while helping homeowners avoid foreclosure.

Short sales are not for all investors, as they can be complicated and time consuming. However, the current numbers of short sales are presenting investor opportunity; and I believe their total numbers (and Foreclosures if a Short Sale is not accomplished) will continue to grow substantially until early 2012. To avoid frustration and excessive time spent with banks I recommend that most, and especially new, investors outsource your short sale negotiations to experienced loss mitigation or short sale negotiation companies. We can recommend experienced and successful negotiation companies if you do not have one.

Ted Akers and Investor Funding Alternatives, LLC provide 100% purchase financing plus closing costs for Short Sale or REO investors when you have an end-buyer under contract. Investor financing for flip transactions can be accessed at the website www.InvestorFundingSite.com .

AT 75% LTV - Homeowners Consider Walking

According to First American Core Logic 4.5 million home values had fallen to or below 75% of their mortgage balance by the third quarter of 2009. Those numbers are now projected to climb to 5.1 million homes, or approximately 10% of all homes. The 75% threshold is being considered a level where more homeowners consider walking away from their mortgage for financial strategic reasons, EVEN though they may be able to pay. Consultants at Oliver Wyman estimate that 17% or 588,000 homeowners walked from their mortgages in 2008 for such strategic reasons. The full CNBC article can be viewed at the following link:

http://www.cnbc.com/id/35216537

This data along with the Treasury Department HAFA program and FHA’s one year suspension of their 90 day no-flip rule that should encourage short sale investors. Although unfortunate for homeowners, the economy, and valuations those that become proficient in the short sale business could thrive for the next 2-3 years. Those homeowners still able to pay are not really targets for a short sale as a hardship does not exist. The key for investors is to get to the homeowner to consider a short sale as an alternative before they throw in the towel.