BiggerPockets

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

Private mortgage insurers are seeking deficiency judgements, too:

http://www.marketwatch.com/story/walk-away-from-your-mortgage-insurers-may-follow-2010-08-06?siteid=yhoof2

The number of renters may be increasing as many previous homeowners transition to renting (we have some tenants that did just that). But I don't think it'll be a one-for-one correspondence since many homeowners who are leaving their homes aren't necessarily renting another residence. Bob Norris showed us a chart of where people losing their homes were planning to go. If I recall correctly, less than a third planned on renting a place. So where are they going?

Many, like my sister, are moving back in with family, thereby decreasing the number of households in the market. This consolidation of households is also precipitated by the tight employment market and rising the costs of food and energy. Sure, the price of a 60" LCD TV may be coming down, but you can't eat one! :wink:

Furthermore, somebody needs to absorb these abandoned homes (foreclosed, short sold, etc.). If there isn't a strong retail buyer segment and investors purchase all these homes for rentals, we're going to end up with too many houses chasing too few tenants. If the above statistic is accurate, then imagine 10 homeowners losing their homes. Only 3 of them are going to enter the rental market. Who's going to occupy the other 7 homes? Seven brand new buyers? We can only hope.

Then there might be a couple of homeowners that end up staying in their home, payment free, because the bank is holding off on foreclosing (I have some friends in this exact situation). They are neither in the rental market, nor is their home. When they eventually leave, where will they go? If they go rent, great for us. If their home gets sold to a retail buyer, even better. But what if the home is purchased by an investor as a rental and the family moves in with their parents? One less household, one more rental property.

Any thoughts?

Mitch- good points. I don't know if it will be one for one or not. Lets also count the new folks that are entering the housing market each year. There are more of them (due to age) than the # that are dieing each year. So, that should be a net gain in # of occupants needing housing.
Craig- Stay safe! I've actually rented to quite a few folks that have lost their homes. I do check into the reasons. Most were in bad product, loan re-cast and they were screwed. Rent is normally easier to pay than a larger mortgage payment. There will be changes in our marketplace and it is a local thing, imo, not one size fits all type. Rich

Rich, thanks for pointing that out very specifically.

Some relevant links.

1/4 of renters say they'll never buy:
http://www.biggerpockets.com/links/6215

what happens to household formation in a recession:
http://www.biggerpockets.com/links/3179

So, the moral of that story is to look at their entire loan history when you are evaluating tenant applications from foreclosed people.

I don't skip credit checks, since it tells about the tenant's history. I DO tell them that I am more concerned with recent performance in paying bills rather than what happened more than 2 years ago. I tell them that I am more concerned about payment record with "essentials" (electric, water, gas, rent) than with payment record on non-essentials (Macy's card, Sears card, cable bill). Of course, the gas and electric are needed to heat the building in winter, so that there will be no frozen pipes - a very important consideration up north. I tell them actual numeric credit scores aren't really as important (although I like to see them be higher :wink: ).

Also important is job stability and earnings; annual income divided by 36 is approximately the max rent per month they can "comfortably" afford (basically, monthly rent should consume less than 1/3 of monthly income).