Blog Entry dated 6/21/2010 10:28 AM

This is a test

Keep moving forward, ignore the crosswinds

I can’t be the only one who is confused by real estate data. Every few days, there’s another news story about with data that purports to prove how the real estate scene is getting better, getting worse, or staying the same.

Denver, where I operate, is usually said to be faring better than most of the rest of the country. As of November 2009, this city was one of only four cities with a positive gain since November 2008 on the in the S&P/Case-Shiller Home Price Index. The worst among the 20 cities covered were showing declines in the 15 to 25 percent range.

Today, however, a story in Forbes lists Denver among the “new capitals of the housing crisis.” It cites data from Altos Research, a Mountain View, Calif.-based real-estate research firm, suggesting that “the Mile High city is taking a turn for the worse.” That firm provides “real-time” data to Forbes.

In July 2009, it says, list prices in Denver fell 0.5% from the year before—the first decline since 2008. The slump has since worsened, it says. In January, year-over-year asking prices were down 3%, to $368,870.

Fair enough. But that July data today is eight months old. And it comes from a firm whose claim to fame is “real time” reporting? Huh?

Furthermore, we all know that average list prices are pushed around by all kinds of factors. Maybe the owners of lower-priced are suddenly more interested in selling.

I don’t recommend ignoring the news. But at the same time, I refuse to take it too seriously. In all the crosswinds of good and bad trends, it’s impossible to know which way things are going. For investors, the strategy is to continue to look for deals with a margin of safety. For homeowners, the advice is similar.

Do your best to read the macro picture, but then do what makes most sense for your situation today.

Citi Tries "Cash for Keys"

No discussion of government rescue programs for homeowners would be complete without an equally long and baffling list of lender-specific programs. My launch two days ago of the “HAMP/HARP etc.” list now expands to include individual banks’ brands of help for homeowners.

A CitiMortgage pilot program provides incentives for more borrowers to use a procedure known as a "deed in lieu of foreclosure," in which the borrower voluntarily transfers ownership of the home to the lender. That cancels the mortgage debt, and lets the owner stay in the homes for six months,

CitiMortgage says it will give people at least $1,000 in "cash for keys" to cover relocation costs.

The pilot program is available for certain people whose mortgages are owned by CitiMortgage in Texas, Florida, Illinois, Michigan, New Jersey and Ohio. The bank should benefit by avoiding legal costs and reducing the time homes are left vacant and exposed to vandalism. Participants will be required to "maintain the property in its current condition," the bank said. It plans to expand the program if the pilot is successful.

An Alphabet Soup of Home-Help Resources

Homeowners are baffled by the endless array of rescue programs and related industry groups, non-profits, hotlines, buzzwords, and acronyms. To facilitate some understanding, here’s a list—or at least the start of a list—of the most prominent resources out there. In upcoming blogs, we’ll explain the terms more thoroughly.

HOPE NOW is an industry-created alliance of mortgage servicers, investors, counselors, and other mortgage market participants. It is implementing a coordinated plan to help as many homeowners as possible prevent foreclosure and stay in their homes. Go to http://www.hopenow.com/ or call the free Homeowner’s HOPE™ Hotline at (888) 995-HOPE.

The Home Affordable Modification Program (HAMP) was created by the Obama Administration to help homeowners refinance or modify their mortgage payments to more affordable levels. Homeowners who are in immediate danger of foreclosure may qualify for a loan mod that may reduce their monthly mortgage payments to no more than 31 percent of their gross income. If the borrower makes timely payments on the modified loan, they can receive up to $1,000 a year for five years to be applied to their mortgage loan. There is no charge to the homeowner for the loan modification. The program will be available until December 31, 2012

The Home Affordable Refinance Program (HARP) is designed primarily for people whose monthly mortgage payments are up-to-date but who cannot refinance into a lower-rate loan, typically because their loan balance is higher than their property is now worth. Homeowners who have adjustable rate loans and a good payment history may be able to refinance their loans into a stable, fixed-rate 15- or 30-year mortgage. These homeowners may not be in immediate danger of foreclosure, but are facing a future mortgage payment they will not be able to afford. Also, credit worthy homeowners who owe more on their home than the home is worth may be able to refinance their loans to take advantage of lower interest rates – something they were not previously able to do. This program will be available to eligible homeowners until June, 2010.

More information is at http://www.makinghomeaffordable.gov. Here’s a good article differentiating HAMP and HARP: http://www.heraldtribune.com/article/20100110/ARTICLE/1101000/?p=all&tc=pgall

NeighborWorks® America creates opportunities for people to improve their lives and strengthen their communities by providing access to homeownership and to safe and affordable rental housing. Much of our success is achieved through our support of the NeighborWorks® network more than 230 community development organizations working in 4,400 urban, suburban and rural communities in all 50 states, the District of Columbia and Puerto Rico. For more information, go to http://www.nw.org/.

Go Ahead? Walk Away?

A homeowner called in response to one of my “We Buy Houses” advertisements. She was interested in selling but not “highly motivated,” to use the industry term. Her condo was worth maybe $37,000 in fully fixed-up condition. She and her husband had more than $75,000 in debt on the place, in a first and a second mortgage, secured at times when credit was much easier.

I regretted breaking the news to her that a short sale was the only way out. I outlined the process. Both lenders would have to agree to accept less than what they were owed. The owner of the second lien would have to agree to take “much less” than the $18,000 due. She and her husband didn’t like the idea of walking away from an obligation, nor the prospecting of becoming renters, not homeowners.

“You are already renters.” I didn’t say that exactly. But that was the essence of what I told her. If you’re paying to live in a place in which you’ll never build equity, aren’t you in fact renting? I say certainly. Holding the deed is a mere formality.

“I admire your integrity.” I did say that. She’d actually been overpaying on the second, hoping to eventually retire the debt. Should she continue doing so?

“I wouldn’t,” I replied. Should she devote the extra funds toward paying down her first mortgage? My answer was the same: “I wouldn’t.”

This report by a University of Arizona law professor, Brent T. White, identifies two reasons people keep paying on underwater mortgages. One reason is to avoid shame and guilt. Another is exaggerated anxiety over foreclosure’s perceived consequences.

This point from the report is most poignant: Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility.

In other words, the banks didn’t worry about honoring their moral obligations. His point is, “Why should you?”

Suspension of FHA Flip Rule is Good for Homebuyers Too

The Federal Housing Administration has long banned FHA borrowers from buying homes previously owned for less than 90 days. To potential homebuyers, that may not have seemed like much of problem. After all, there are plenty of homes available in the MLS.
But to the investors who buy distressed properties and fix them for a quick sale, the restriction has been a big roadblock. Now the blockage has been lifted.
The FHA just announced the waiver of 24 CFR 203.37a(b)(2). The temporary halt will take effect on February 1, 2010, and will be effective for one year unless otherwise extended or withdrawn by the FHA Commissioner.
Investors are elated, but homebuyers should be happy too. A new supply of cheaply bought, well repaired homes will come on the market. Many such bargains wouldn’t happen without removal of the 90-day capital-carrying burden imposed by the FHA.
Homebuyers should seek out bargains rather than let Realtors restrict the “inventory” to listed homes. Search for terms like “wholesale homes” in your area. Many such properties are unlisted—in effect For Sale By Owner. If a broker won’t approach FSBO sellers, search for “real estate lawyers” to make such purchases possible.