A Midyear Real Estate Status Report
8.27.09
Stephen J. Nash
Nash & Lodge,
PLLP
nash@nashandlodge.com
RealtyTrac has reported that more than 360,000 foreclosure notices were received by
U.S. mortgagors in July of 2009 (this means one in every 355 U.S. homes received at least one foreclosure filing in July)!.
July was the fourth straight month where foreclosure notices exceeded 300,0000.00 (until April of 2009, RealtyTrac had never
reported over 300,000.00 foreclosure notices for a single month). RealtyTrac
also reported that one in every 558 housing units in Minnesota received a foreclosure notice in July and that the Minneapolis
metro area had the second biggest increase among the 20 largest U.S. metro areas in foreclosure findings from July of 2008
to July of 2009. The foreclosure rate is now one in every 90 housing units. The highest rate for July in the country
was reported to be in Nevada where one in every 56 housing units received a foreclosure notice and Las Vegas with a foreclosure
rate of one in every 13 housing units!
TransUnion reported that in the second quarter of 2009, the mortgage
delinquency rate in the United States hit an all-time high. For the months April, May and June, 5.81 percent of all
mortgage holders were 60 days or more behind in their mortgage payments. This is the 10th straight quarterly increase
reported.
The Mortgage Bankers Association reported that 13.16% of all residential mortgages were at least one payment
past due in the second quarter of 2009. This is the highest default rate ever reported by the MBA. Credit
Suisse predicts that we will experience 6.5 million foreclosures by 2011.
The Switch From Subprime Foreclosures
The MBA
reported that subprime mortgages no longer make up the majority of today’s foreclosures. The focus has shifted
to Alt A mortgages, Option ARM mortgages and Jumbo mortgages.
As a result, the value of the properties in
foreclosure will climb since these products were often used for people with good credit who were buying more expensive homes.
These mortgage products featured interest only (or negative amortization) loans and required a buyer to pay little to nothing
down allowing a buyer to purchase a much more expensive home, than they normally could have afforded.
Each of
these types of loans along with Home Equity Lines of Credit (HELOC) now have soaring delinquency rates.
Type
of Loan Amount Written
Percent Underwater
Alt A
$2.4 Trillion
45%
Jumbo Prime
$1.3 Trillion
Option ARMS $750
Billion
73%
HELOCs
$1.2 Trillion
Prime
$4.6 Trillion
25%
We are just now reaching the very beginning of the Alt A's resets. Most are not scheduled to peak until
2013. With home values continuing to fall, with the huge influx of negative amortization/interest only loan programs
and the likelihood that mortgage rates will not be kept historically low throughout the next 4 to 5 years, the switch to the
Alt A and Option ARM market could be extremely painful.
The switch in the types of mortgages being foreclosed is important to
everyone in real estate, whether they currently understand it or not. As bad as the subprime foreclosure wave was, the
next wave will be much worse. Lenders, homeowners and real estate professionals all had a difficult time dealing with
the problems resulting from the subprime mortgages. Loan modification plans didn't pan out, short sales were tedious
to get approved and many of the people involved did not really have a true understanding of all of the tax, financial and
legal consequences of what they were doing. The scary thing is that the next wave of foreclosures will be much more
difficult to deal with for the following reasons:
1. The subprime mortgage properties tended to have only one mortgage on it while the new wave will most likely involve
2 to 4 mortgages.
2. The borrowers in the subprime foreclosures had very few assets for the lenders to go
after, so it was easier for a lender to go ahead and forgive a debt that would most likely never be collected. However,
the new wave of foreclosures will consist of borrowers who do have assets and also significant incomes, just not enough to
pay all of their debts.
3. The delinquency amounts will grow from 10's of thousands to hundreds of thousands on
a particular property.
4. Many of the new wave loans being foreclosed will feature negative amortization mortgages,
which will only increase the amount of the deficiency;
5.
The more expensive the home, the harder it is to sell.
6. The general economy is now adding to the real estate troubles.
Just because you experienced success with the subprime short sales in the past, does
not mean that you will be ready for the next onslaught of foreclosures. Do not assume you will fully understand the new wave
of troubled properties, or that your past strategies will still work under these brand new situations. Continue to educate
yourself on the issues and make sure you work with a team of diligent professionals who can help your clients travel through
the difficult issues they are facing.
More Homes Underwater
While the types of properties in trouble are
ever changing and the hurdles become even more difficult to navigate around, as a real estate professional you cannot simply
avoid these properties. As set forth above, the number of foreclosures continue to climb and the number of homes underwater
continue to grow at the same time that home values continue to fall. According to T2 Partners, 25% of properties with
prime mortgages, 45% with Alt A's, 50% with subprime and 73% with Option ARM properties are now underwater.
Zillow.com
has reported that 24% of homes with a mortgage are upside down (this number is even low considering it does not deal with
properties where there was a cash-out refi or after-the-fact second mortgage). Duetsche Bank has predicted that 48%
of all homes will be upside down by 2011. While it is difficult to know how accurate these numbers are, the fact of
the matter is that we all know a significant number of homes are upside down. Unless there is a way to deal with this
negative equity, the result will be more foreclosures and more homeowners will be unable to sell their homes - neither of
which will help the real estate market return to normalcy any time soon.
Loan Modifications: All Hype,
Little Substance
Every time a new loan modification program is rolled out, grand predictions are made
as to how many homeowners will be able to save their homes. The reality is that none of the loan modification programs
have put even a dent into our foreclosure problem. Economist.com reported that out of the 4 million borrowers targeted
by the most recent loan modification program, only 235,000 have received a modification. What's even worse is that historically,
over 60% of those receiving a loan modification were back in default within six months time.
Why haven't the loan modification
programs worked? The following are three reasons:
1. Lenders are not willing to forgive the debt that exceeds the property value, so even if the monthly payment is
reduced, the underlying problem still exists.
2. Because of our general economic problems, more people are losing their jobs or their
income has greatly decreased to the point they can no longer make their mortgage payments, even if the payment is reduced.
3. It is difficult to obtain a loan modification when dealing with one lender,
but when dealing with multiple lenders it becomes almost impossible
Have We Hit Bottom Yet?
Sales have
shown a gain for 4 straight months. The S&P/Case-Shiller index has shown a slight increase in homes for the first
time since 2006. But before you get too excited, other statistics may not be quite so rosy.
1.
How many sales were generated by the $8,000.00 credit and
what happens when it goes away?
2.
In most markets the activity is all at the lower end of
the market
3. Lending standards have not loosen up, especially for larger loans.
4.
The housing inventory has shrunk which has boosted values; however, that is more the result of the foreclosure moratoriums,
which have expired, and the fact that lenders are still holding a significant number of foreclosed properties that ultimately
will have to be put into the market.
5.
The next wave of foreclosures are going to be more difficult to deal with, which likely will result in a greater percentage
of these homes becoming bank-owned properties which will further drive down prices.
Ironically, the next wave of foreclosures
may actually increase the median sales price because even though the homes being lost to foreclosure may take a more significant
drop in value, they will still sell for more than the homes on the low end of the market and thus could raise the median price
for the market as a whole.
Once We Do Begin to Recover How Long Until We Get Back to 2006 Values?
Many people
seem to be holding on to 2006 as if we have just temporarily gotten derailed and hope that as soon as we turn the corner,
property values are going to shoot right back to the 2006 values. I believe this is wishful thinking for the following
reasons:
1. Prices in the Minneapolis metro area have
fallen to January 2001 levels (from the S&P/Case-Shiller Seasonally Adjusted Home Price Value data), even with the tremendous
housing burst experienced after 2001 it still took 4 to 5 years to reach the 2006 values - what are the odds that we are going
to see such a quick run-up in values again?
2. The 2001 -2006 increase in values was fueled by cheap credit, little regulation and
low to non-existent lending standards - what are the odds of this combination of factors happening any time soon?
3. The
2001-2006 increase was fueled by a public attitude (promoted by the U.S. government and industry) that discouraged savings
and encouraged borrowing - what are the odds that the millions of people who were, are or will be caught up in this economic
tsunami will take the same risks that allowed them to get into the trouble they are in today (does anybody today believe that
real estate values always go up)?
4. The Case-Shiller trend line shows that we are still 5 to 10%
above the trend line. Normally after a bubble bursts values actually fall below the trend line before moving upward.
However, even if the values start moving upward, the trend line shows an average growth of about 4% per year. At that
rate, we are a long way off from seeing 2006 values.
How Does the Economic Outlook Impact Your Business Plan?
Obviously,
it is difficult to earn a living in an economically devastated industry. Everyone’s first goal should be to survive
or get out of the business. There is no "easy money" to be had. If you are not prepared to fight for
survival and change how you do business, you will not survive.
Once you have decided that this is your profession for better or worse,
you need to come up with a business plan based on the 2009 realities and not on your 2006 memories. We probably will
never see a 2002 - 2006 real estate market again in our life times. It will take a long time for consumers, lenders
and real estate professionals to lose the fear of the devastation we have all lived through in the past few years.
Decide what
is necessary for you business and what is a luxury. Determine what is for convenience and what is for efficiency.
Can you afford to pay for luxury and convenience? Can you afford not to invest in efficiency?
Don't be afraid to try new business
models. I don't know what the real estate world will look like tomorrow but I am thoroughly convinced that it won't
look like it does today. The ones who discover that new model will surge ahead of the rest.. As a law firm that
has extensive involvement in the real estate world, we have decide to switch to flat fee billing as much as possible.
Everyone in real estate and in the economy as a whole, is hurting and hourly rates tend to scare and discourage people from
obtaining legal advice. To address that fear, we have converted many of our services to flat fees so our clients will
know in advance what their cost will be. Law firms have always operated on the "billable hour" business model,
which makes it difficult to change, but I am convinced that the change is needed and that the “billable hour" business
model may not be the dominant business model five years from now.
Whenever you make a significant change you will experience discomfort. You may be wrong; however,
unless your business miraculously does go back to "normal" overnight, the businesses that do choose to find a new
model will separate themselves from the rest. If you get it wrong the first time, you change again. You continue
to evolve until you hit the right formula for success in the new business world that we are entering.
Remember, change may be difficult, but dying
a slow death is also quite painfulNOTICE
The foregoing is not intended to constitute
legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law,
relevant to a typical situation. Each set of facts and each contract are, or can be unique; the unique facts and specific
language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in
reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant
to your situation.
Copyright 2009 Nash & Lodge, PLLP
