During the Clinton years, it was, “it’s the economy, stupid!” Now, without doubt, “it’s the mortgages, stupid!” Without a major fix, the global economic meltdown, most experts say, will only grow worse.
And, if you think that is not possible, just check out the value of GM shares! They’re so weak, you can almost trade in your current GM vehicle for the entire company!

Individual banks have been lining up to announce they have come up with plans to help people who are on the verge of foreclosure. These plans don’t go far enough or help enough people.

The Government announced yesterday, a “plan to ease mortgage payments for troubled borrowers through finance giants Fannie Mae and Freddie Mac,” according to Reuters.

But even this is probably not enough.

A New York Times report paints a stark and scary picture of the housing situation in the nation at the moment. The article quotes a real estate data company’s findings that 7.6 million homes in the U.S. are “underwater” (the new term for negative equity)–and more than 2 million more are about to fall off a cliff.

And, one poor California town, Mountain House, has the dubious distinction of having about 90 percent of all its homeowners owing more on their mortgages than the actual worth of their houses!

Clearly, the government must do more…a lot more…to stop these homeowners from, understandably, walking away from their devaluing homes.

The solution will by its very nature be unfair to those who borrowed wisely and are continuing to pay their mortgages. But, when a town has 90 percent of its home owners in negative equity–with more towns to surely follow–fairness becomes less important than being practical.

Whether you voted for Barack Obama or not, you have to almost feel sorry for the guy, taking office with the expectation that he will save the U.S.—the world—from further economic ruin.

A new AP poll just out shows 7 in 10 people–an amazing 72 percent– “voice confidence the president-elect will make the changes needed to revive the stalling economy.” 44 percent of Republicans reportedly feel the same way!

But “Superman” doesn’t fly into Washington to save the nation till January 20th and many bad things can happen till then.

That is why Bushman, if he has any sense of legacy, will use the same awesome executive powers he used to subvert the Constitution to help jolt the economy.

A lame-duck Congress was a possibility…but leaders there don’t feel much like calling one if Bushman is going to stand in the way.

As the saying goes—-lead, or get out of the way! That’s a hint, George.

Photo Credit: DifferentObamas

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Tags: fannie, foreclosure, foreclosure rescue, freddie, housing rescue, mortgage, paulson

I love real estate as an investment class, but I must say, I do know of other investments that from time to time hold better returns than rental real estate.

Whoa! Hold on, mister!

I know…blasphemy! Talking about real estate’s downfall’s as an investment class can get one lynched over here…so I”ll tread lightly and prove my point.

Right now with all the government involvement, nobody knows where the real estate market is headed…at least not with enough predictability to make financial decisions that are significantly better than simple “guesses”.

Not so a year ago….back then I absolutely knew housing pricing were dropping and would drop at least another 25% in my area. I could plan investment strategies knowing this. But not now. The government has so deeply entrenched itself into the banking arena, I have no clue what banks will do with their mounting foreclosure portfolios.

Will the borrowers get “bailout” money from the Feds? If so, then the banks just need to wait. This waiting will kill the current “short sale” market…the only existing home sale market in many California areas which is responsible for setting new lower prices for entire neighborhoods.

This is really disheartening…as a real estate investor, I wish the Feds would get their fingers out of the banking system, and quit trying to “save” the real estate market. The only thing that will save the real estate market, much like what is said about alcoholics, is hitting bottom.

“Hitting Bottom”…it’s an ugly term.

It reminds us, we can get collectively “drunk” and take the real estate market with us on some symbiotic roller coaster ride to the dark side where the party can kill. This is where we meet the Wall Street MBS investors who sacrificed intelligent underwriting for greed, who get us started with a few tequila shooters on an empty stomach before sending us to meet the Life of the Party, Fannie and Freddie! Those two kept us plied with drinks until the wee hours of the morning.

But the morning comes whether we like it or not…and lying beside us…the ugliest borrower ever! Coyote Ugly…if you know what I mean. Waking up next to a mortgage “date” that has no income, or credit, or looks or body…and who once awake, claims “you forced the loan”….when in reality the exact opposite was true…screams, “I’ve hit bottom”. You know you’ve hit bottom when all you want to do is take a shower and start over.

But in the name of “helping”, the Feds step in and deny you that shower and the ability to start over. They talk about rehab, second chances, bailouts, and regulation instead of the more effective “going broke”, “losing your house”, and “filled with shame” self-regulation that should rule the day.

Instead of hitting bottom, we’re left to hang in limbo - shame intact - waiting for the now much more distant day this will all be over.

And that’s why I think investing any further in the real estate market is too risky!

Next week, I’ll tell you my perfect investment that mimics many of the pluses of the “old” real estate market and is the right investment vehicle for these uncertain times…

Stay tuned…

Photo Credit: danflo

Tags: bailout, foreclosure, housing bailout, real estate investing

Zillow published a report today showing in fast relief just how out of touch the average home owner is when it comes to evaluating their own homes value.

Zillow’s survey says that half of home owners think their homes are worth the same as they were a year ago. 32 percent believe their home went up in value and 17 percent feel their home decreased in value.

Compare this to the reality that about 75% of all homes lost value since last year…we see just how delusional home owners really are.

It’s hard for me to fathom how the American public with hour after hour of news coverage on the real estate crisis, could still be so colossally blind to the truth.

Are they burned out…are they sticking their heads in the sand?

Is it too much to take to recognize the house you paid $400,000 three years ago is really worth only $200,000 today?

It just so happened a few minutes before reading the Zillow survey, I’d heard a pundit on CNBC say, “All across the US, the only real estate market is the foreclosure market”…meaining the only sales being executed were those done between banks and investors on foreclosures. He mentioned in some locales 80% of all resales were foreclosures.

If home owners’ perceptions are so glaringly wrong about the values of their homes, I can see why the “only the real estate market is the foreclosure market”. Folks who can’t face the truth don’t price their home to sell and the market shouts the truth at them…usually in vain.

It dawned on me if home owners don’t get their expectations in check, put their homes on the market at realistic prices, it won’t matter how loose or tight mortgage underwriting is or whether Bernanke can get mortgage reform passed.

It won’t matter because, there will be no one standing in line to borrow!

This is potentially more dangerous than a banking crisis. It’s like have a party and no one shows. Bernanke and Paulson are busy saving the banks and mortgage securitizers so the mortgage industry can stay operational for all the new borrowers once this hiccup is solved. But what if after all that, American’s can’t find a house to buy at a market price and sit on the sidelines?

It’s what happened to Japan when they hit the wall. Their central bank dropped rates to zero and still couldn’t get people to borrow.

What if the banks, now that they have government support, hang on to their foreclosure properties deciding to wait for a better market in which to sell? Between asleep homeowners and greedy bankers, the real estate market could be the next big “freeze”.

There is only one thing worst than dropping home values…frozen home values. At least if they are dropping, an end is coming. With frozen home values, a state of limbo exists.

This would really be the nightmare scenario everyone is trying to avoid. This is why Congress is having such trouble putting money in the hands of foreclosure victims. They don’t want to do anything that will stall the dropping of home values. They’d better watch out. If they give the banks too much support, there’s no motivation to liquidate foreclosed homes either.

As the Zillow report reminds us, you can’t legislate intelligence or awareness…and without it, our housing market could be in for the freeze no government or banking official can do anything about.

Yikes!

Tags: bailout, foreclosure, housing bailout, mortgage, REO

This proposed plan comes via New York Times business columnist Joe Nocera. And, he, too, no doubt wishes he came up with this plan. He didn’t. He is quoting from a dude named Daniel Alpert, who the Times describes as “a founding partner of Westwood Capital, a small investment bank.” He is someone the Times has apparently turned to a number of times in the past for expert quotes.

Of this plan, says Nocera, “…a proposal came across my desk that I believe is so smart, and so sensible, that I hope our nation’s policy makers will give it a serious look.”

Okay already. What’s this great plan????
The plan is, a law would be passed that “encourages homeowners with impaired mortgages to forfeit the deed to their lenders but allows them to stay in the homes for five years, paying prevailing market rent,” says the Times article. In turn, says the article, quoting from the plan, “the lender would be forced to accept the deed, and the rent. After five years, the homeowner-turned renter would have the right to buy the home back, at fair market value, from the lender.”

The article goes on to talk about why this plan would be so good for the homeowner, the bank and the country.

Most important, it would create a sort of “time out” for five years during which homeowners would presumably get their financial cards in order, banks would be in better shape, and the global fiscal crisis upon us would have long been a distant and very bad memory.

As we have been saying here for some time, the Times article raises the key question: Now that we have “saved” Wall Street, isn’t it time to “save” Main Street?

The current mega bank bailout using all of our money only helps distressed homeowners indirectly, and, even that is questionable. So far, banks show little to no sign of coughing up more mortgage money and rates on fixed rate mortgages have gone up and not down in recent days. Doesn’t sound like a rescue plan for Main Street to me!

I agree with Joe Nocera that this proposed plan is far better than anything John McCain or Barack Obama or President Bush (well, okay, we can discount him right away) or the Congress has thus far come up with.

It makes sense. It would probably work. It is fair to all sides. And, sadly, that is why it probably doesn’t have a chance to be put into action.

Photo Credit: david.nikonvscanon

Tags: $700 billion, banking rescus, facing foreclosure, foreclosure, homeowner rescue

Buying a short sale can be a great way to make a smart real estate purchase, given the conditions in today’s market. More frequently, home buyers want to look at nothing but foreclosures, REOs, and short sales during their real estate search. However, just because a property is being sold as a short sale, or some other form of a distressed asset, does not mean that it is necessarily a good purchase. This article will focus on the top three mistakes to avoid when buying a short sale as a residence.

Short Sale Mistake Number 1 - Don’t Fall in Love with the Property

Real Estate is an emotional purchase. As a matter of fact, most purchases are emotional purchases. When we make emotional purchases, we do a funny thing. Many people don’t realize this, but when we make emotional decisions we tend to justify those decisions with logic.

For example, I want to buy a four door Jeep Rubicon. I like them. I want one. The other day I thought to myself that it might be time to buy that Jeep solely based on the fact that our economy was in such bad shape. I started thinking that I could probably get a really good buy right now. I even started thinking that if I end up waiting a few years that I will probably end up paying more for the same Jeep that I could buy now. So I should buy one know. In my head, I am trying to logically justify an emotional decisions.

The same thing happens for home buyers, only the emotions when buying a home are a lot stronger (typically) than when buying an automobile. Some common logical justifications for emotional home buying decisions that I hear are:

• The house is pretty expensive but it is closer to work and we can save money on gas
• We might lose money when we our current home now, but we can make it up on the purchase of a new home
• The house is smaller, but that makes it easier to clean
• That extra bedroom would be great if (fill in the blank) ever had to come to live with us

Don’t Be in a Hurry

Dont’ Overpay

Real estate riches are commonly created when people by real estate below market value. Market value is easy to determine, if you have the data. If you do have the data, market value can be found by looking at two factors: what is currently for sale, and what has recently sold. If you don’t have the data (or are working with an incompetent agent) then market value may be determined (or mis-determined) with false data sets. For example, here is a list of things that don’t affect or indicate value, but are commonly referenced by “experts”:

• Unpaid pricinpal balance: what is owed on the property has nothing to do with what it is worth
• The Tax Assesment: what the property appraiser says a property is worth means nothing (unless he is buying the property)
• Property sales that are more than 90 days old: the current real estate landscape changes so fast, a comparable sale from six months ago is no longer comparable. 

I suggest considering the home values from 2002-2003 when buying a home. The values from these years generally indicate “pre-boom” values. They are more closer to “normal”. These values should not be solely considered, but should be referenced as a sanity check. If you can buy today, at the price from 2002, then you are most likely looking at a relative good buy. This happens fairly regularly in a short sale transaction. Lenders know to discount the properties to a point that makes them attractive to buyers. This usually means discounting them to “pre-boom” values.

Tags: foreclosure, real estate, REO, short sale, short sale mistakes

Two months ago, hardly anyone knew of credit default swaps, commercial paper, mortgage backed securities, and mark to market accounting. Now, guys like Hank Paulson and Ben Bernanke are household names right up there with Barack Obama and John McCain. It seems that everyone in America woke up a new financial guru because of our current financial meltdown.

It is not hard to find an opinion as to who is at fault or to hear how we ended up in this mess.
As a matter of fact, a prevailing theme is how the government and big banks screwed everyone. “Send them all to Jail”, is a common outcry. Of course, “Them” is all the fat-cats on Wall Street who got rich at the tax-payers expense.  While an element of that sentiment is probably true and healthy, most would agree, that the root of the problem is very simple and mostly removed from Wall Street and Capitol Hill. People took out loans that were leveraged against property that were neither affordable, nor was the collateral worth the loan amount. It is really that simple. The situation is not really any different than getting 100% financing on a new vehicle that you drive off the lot. Everyone knows that when you purchase a brand new vehicle, the “value” sinks that minute it becomes “used”.

How is that any different than buying a home? Prices go up. Prices go down. Sometimes people buy a McMansion they can’t afford and sometimes people by a Mercedes they can’t afford. When this happens, there is was a process for handling each situation. Our meltdown is a function of too many people not being able to afford too many McMansions (ok, they weren’t all McMansions - but that is a relative term). 

What Should we do, Then?

In my humble, simplistic opinion, what we desperately need is a simple solution for people who borrowed too much money and made a bad financial home-buying decisions. Forget Wall Street, Bail Outs, deflation, hyper-inflation, and Elections for a minute. Let’s just cut out the confusion and decree that if you borrowed money that you cannot afford, it will be paid back sometime, somehow. And the way that we are going to do it is called a promissory note. Here’s how it works. If you bought a house for $250,000 and can not afford it then you need to sell it. If you can’t get what you paid for it, then you owe the difference to your lender(s). The lender(s) can either make you liable for the entire difference, a portion of the difference, or none of the difference. The result is a simple function of your ability to negotiate and your lenders process for dealing with this particular type of loss mitigation.

Here is where the Government could help.

The Government could inject capital by purchasing these loans. In essence these promissory notes would become unsecured lines of credit against each individual borrower no different than a credit card. These loans would probably have fairly high default rates. The Government should offer to pay a fair price for these loans. After a bank reaches an agreement with a distressed borrower, the government would offer to pay a fair amount for the default deficiency note given that the note has a good chance of being a non-performer. Now here is where it gets appealing to the home-owner. Over time, the banks would learn that by charging a lesser amount on promissory notes vs. total deficiency, the higher chance that they would have to collect on the note. Therefore, the lower percentage notes would sell for a higher amount. Therefore, the banks would be incentified to strike deals with borrowers that would perform.

The bank would be incentified to do these transactions because they will recoup funds from the sale of the real property and they would either recoup additional funds by selling the promissory note or receive additional revenue from the promissory note. Either way, it’s much better than the quagmire that they are in right now. Many may be wondering why the borrower would want to do this. Why wouldn’t they just walk away. Well, to put it simply, they could. They could just walk away. And the cure for that process is foreclosure with a resulting deficiency judgment. Compare that with an affordable, low interest, long term, promissory note.

Tags: bailout, foreclosure, housing, Mortgages, promissory note, short sale

In a sign that things have really gone awry, a 90 year old woman, Addie Polk, who was being evicted from her foreclosed home, shot herself two times. This tragedy has become a national story.

According to CNN, “Fannie Mae said it will set aside the loan of a woman who shot herself as sheriff’s deputies tried to evict her from her foreclosed home. On Friday, Fannie Mae spokesman Brian Faith said the mortgage association had decided to halt action against Polk and sign the property “outright” to her.

‘We’re going to forgive whatever outstanding balance she had on the loan and give her the house,” Faith said. “Given the circumstances, we think it’s appropriate.’”

Thoughts?

Tags: addie polk, bailout, fannie mae, foreclosure, mortgage mess