You have probably read about the slew of Ushud complaints about the lending regulations that are now in place. We have been discussing and promoting the reversal of many of the regulations and reforms that have been inflicted upon the mortgage industry, the real estate community and the American public at large. The complaints are not limited to the banking industry but we will cover those here in order to stay focused on the single largest reason that the housing market remains in the doldrums of the current sluggish market.
The reaction to the housing crisis was swift and in our opinion an overreaction. It was this over reach correction that has actually deepened and perpetuated a bad situation. For a decade before the housing crisis there were statistics available that indicated that selling a home with no money down programs had foreclosure rates 5 times higher than the minimum FHA minimum down payment of 3 percent. Programs that allowed no money down purchases such as the Ameridream and Nehemiah suffered even before the banking implosion as they regularly had foreclosure rates ranging from 17 to 20 percent. These programs were only phased out because they were under cut by the zero down loans provided by every major mortgage lender in the country.
Ameridream and Nehemiah were convoluted and somewhat complicated and that in retrospect was the saving grace for the market. But by looking at the results of these programs it wasn’t hard to see that the mortgage industry was in a suicide pact on its race to pile on profits at the cost of collapsing the entire market place. Ushud.com complaints about the practice of financing the un-financeable stretch back to 2002 . What we didn’t see and did not forecast was the impact these exotic mortgage programs would have on the entire market. We spoke out against the practice of setting people up for failure by not requiring any actual documentation or credit worthiness. By focusing on the people immediately affected by these questionable lending practices we too missed the bigger picture.
So now the pendulum swings in the opposite direction and minimum down payments were increased in order to combat a problem that did not exist. In the past decade when purchasers invest 3% in their own home they have had an average foreclosure rate of 4% which is completely reasonable. Foreclosures were occurring long before the mortgage industry determined that subprime and prime were the same thing. The difference was that the number of foreclosure could be covered by the mortgage insurance paid by the 96% of the homeowners that did not go to foreclosure.
We shouldn’t be punishing the people who are now trying to buy homes because of the people that came before buying more than they could afford. And by punishing them we hurt the seller and eventually the entire industry.
As the sequel to one the blockbuster film Wall Street, writer director Oliver Stone tries to capture the magic of the original by using the market collapse of 2008 to propel the film beyond the original. This timing aspect of Wall Street: Money Never Sleeps is great catalyst for bring to the forefront the impact that the actual felons on Wall Street have had on the housing market and the outrageous number of real estate foreclosures that remain an unsolved problem for many states, cities and neighborhoods.
The film could have been titled Scumbags Never Sleep as the characters in the film are loathsome and greedy and really the film did not have one likable character. This does not mean that the film is not good. In fact it is fairly good and could be considered a “must see” for those of us that have been directly affected by the financial down turn. Like the film before it Wall Street: Money Never Sleeps uses to great effect the character Gordon Gekko which Michael Douglas made famous with one key phrase “Greed is Good”
In the sequel Gordon has seen the error of his ways and the destruction that he caused to his family. He is contrite and wants to make it up to her. So in order to make it up to her he lies and then swindles her naïve fiancée and then rips everyone off. Not the home coming we wanted as the audience but it is more realistic as Bernie Madoff has proven recently. Gordon is a player in a game that does not consider collateral damage. Gordon is like money itself and like Wall Street. Both are dirty and neither possesses a conscience. A market collapse means additional opportunity for Gordon. A housing crisis means investing in apartment buildings. The concept of the majority being screwed by the actions of a few does not work into their equation.
At one point Gordon Gekko says “Idealism kills every deal” This quote comes from the opposite direction but has the same sentiment as “Greed is Good” from the first film and like “Greed is Good” removes the person saying it from any responsibility. It also explains the ever increasing number of real estate foreclosures as each tier of the film eventually loses their idealism. After all if someone is forced to think about the consequences of their actions they may not be able to pass laws as congress did that blew open the door for low income people to buy middle class homes that they could never afford. Investment bankers may not have mixed subprime and prime mortgages in one package and selling them off as if they were all prime. Loan officers and real estate agents may have thought twice before promoting people to buy home than they could afford.
Responsibility for the explosion of real estate foreclosures rests with all of us. We like to blame which ever category we personally don’t fall into but it is everyone’s fault. The person with the most knowledge and experience we hope will accept the responsibility that we have entrusted with but there are no guarantees of this and few examples. “Buyer Beware” should be the mantra for everyone as we navigate the troubled waters ahead. Real estate foreclosures are only one of the problems that the investment community has left us to correct as they go about their business of making money from chaos. If you haven’t seen Wall Street: Money Never Sleeps, it is worth the watch. It may make you feel better or worse but it will definitely make you smarter next time.
REO properties are the single largest problem that must be solved before the economy can recover. Executive bonuses are a very good symbol of the excesses of the Wall Street but Wall Street was only the pawn shop for our housing market. Wall street bought and sold the goods but lending institutions such as Citigroup and Countrywide were the criminals that broke into our homes and stole the equity.
By sharing the responsibility for the economy with both the banks and the borrowers we can right the ship. USHUD.com reviews the problem and sees three easy steps that could solve the problem and stabilize the housing market.
- Make it nearly impossible to file personal bankruptcy
- Make it impossible for banks to make money without lending
- Reset and fix all adjustable rate mortgage to their original interest rate
(A) May seem like a added hardship pressed on those that are already going through tough times but it can also be argued that making people responsible and holding them accountable makes for more prudent buying decisions. Bankruptcy was designed to be used for true hardship not an accounting maneuver to get out of paying off debt.
(B) Banks are now making more money than ever by borrowing money from and then lending it back to the government. This eliminates the risk associated with lending to the small businesses and consumers. It is also incredibly profitable without actually putting anything at risk. Too big to fail has become too big to lend.
(C) Adjustable rate mortgages (ARM’s) are the legacy issues that represent the greatest correctable threat to the housing market. Adjustable rate mortgages will continue to create REO properties as long as the home owner is subject to market fluctuations that they have no control over. This measure if instituted by the federal government will stabilize housing prices as the relationship between home prices and current interest rates will be removed from the overall equation while providing assurance to the homeowner which will greatly reduce strategic defaults.
These solutions would go a long way toward resolving the housing crisis and by extension move us further from the brink of another economic meltdown. These measures do not represent an us against the banks method of correcting the problem. These measures are designed to save the average American family from falling into a future financial trap and to reduce the number of REO properties. Wall Street will always do what makes financial sense and banks are in the business of making money so they cannot be asked to do what is not in their best interest.
There are two ways that the percentage of foreclosed homes on the market can be decreased from the current 43% of all homes sold. First the banks can control the number of homes they put on the market. This means they either have to work out deals with home owners that are facing foreclosure which they are trying to do or they can hold the properties longer in their inventories in order to keep the market from crashing a second time, which they are also trying to do.
Both of the above options are being exercised by banks and lending institutions but for various reasons neither option is viable. When home owners walk away which continues to happen the bank has no option and another foreclosed home is created. Now the bank has to do something with the foreclosed homes created by people that decided they would strategically default or walk away. The reasons aside the point is some foreclosures are unavoidable.
So we are left with the other possibility of decreasing the percentage of foreclosed homes on the market which is to increase the number of conventional resell home transactions. Again the banks are in charge of much of the situation. By loosening the restrictions they have an opportunity to increase the number of transactions and thereby correcting their own problem and ours. But this is the same slippery slope they slid down before. Between federal oversight, the press and the banking executives instinct for self-preservation the banking industry is watching their own inventory of foreclosed homes and trying to manage it by decreasing the potential for foreclosure by only providing mortgages to A+ borrowers.
The only answer seems to be time which is supposed to heal all wounds. It appears that the percentage of foreclosed homes on the market will not decrease until the cycle has worked itself out as banks try to correct the errors of the past without repeating them.
First the benefits of HUD homes for sale are in our opinion the best possible scenario for a home buyer for a number of reasons. Then we will discuss the down side of HUD homes for sale which are few and are nothing to shy away from.
HUD homes for sale are offered in three different categories. We will discuss our favorite first here. That designation is “203k” when HUD offers a home as a 203k it is because the home requires $5000 or more worth of repairs to the home before it will qualify for an FHA loan. These foreclosures are designated as “UI” which means they are uninsurable without repairs. The novice might look at a UI foreclosure home as a negative while a buyer with a little deeper understanding of the potential benefits may only want to buy a HUD home with this designation. HUD homes for sale that are listed as 203k will allow the new buyer to make repairs and upgrades to the home and personalize the home to their liking.
203k does not mean that the buyer has to come out of pocket with any money other than the cost of buying the home which is no more than any other type of HUD home.
The mortgage takes the repairs in to account and increases the loan amount by the amount of repairs. This means that like the old Burger King commercial “You can have it your way baby”
And not only can you have it your way but the buyer can in fact do some of the work themselves and get paid for working on their own home. These allowable repairs are limited to items that do not require a license. So repairing one of the thousands of HUD homes for sale offers the only way in the current mortgage climate for a buyer to purchase a home and get in for no money at the end of the repairs by the new owner paying themselves for the work they were able to do themselves.
We have seen homebuyers take this to the extreme and actually make money buying their home and having the exact house that they wanted instead of a home that was designed and built for some one else.
203k homes are the little known secret about HUD homes for sale and these homes should not be overlooked. It may seem intimidating at first to walk into a home that needs paint, carpet and a new kitchen, but if you can use your imagination and ask yourself what you would like, 203k’s allow you to fulfill your desires in a way that other HUD homes for sale do not.
Don’t be afraid, walk in with your mind open and see the house for what it will be when you are done and not as it is and you can be wonderfully surprised.
In our review of bank owned foreclosures it becomes painfully obvious that banks are manipulating the market so as not to do further damage to equity they hold in millions of homes across the country. Bank owned foreclosures which flooded the market in the past several years have not necessarily slowed in the past year. Banks have just seen the light regarding what happens to their own position when they foreclosure at the volume they were all too willing to in 2009.
In 2009 banks through efforts of trying to get these toxic assets off of their books did not hesitate to foreclose on home owners that were only a few months behind on their mortgage payments. This is no longer the case as banks have realized the damage they do to their own profit and loss statements by reducing the value of all homes in a particular region.
It is not through charity that bank owned foreclosures are now hitting the market with less regularity. Through our USHUD.com review of the banking and mortgage sector we believe banks have come to realize that by foreclosing on thousands of homes in a particular community that they in fact reduce the value of all the homes that they own and will soon own if they don’t strive to work out payment options for those homeowners that are willing and able to come to some agreement that both parties can live with.
When a bank forecloses on 3 out of 10 houses in a particular area they drive down the value of all of the homes in that area which means that more homeowners are left with fewer options. For example when USHUD.com reviews the options that homeowners are left with after their homes have decreased in value by 20-30% we see that selling the home becomes impossible. Renting the home may be possible but not with a mortgage payment that is well above the acceptable rent in that community. Refinancing is not an option as the home has lost too much value to qualify for a refinance. Because the banks themselves have driven the prices down in that area, homeowners that can not sell and cannot rent and are not behind on their mortgage suddenly have no incentive to continue paying for a home that is far underwater that a strategic default or voluntary repossession has become the best financial option left for them. Granted their credit is damaged for a period of time. If the homeowner can save one or two hundred thousand dollars, their credit is a small price to pay.
Think for a moment how hard it is to save $100,000 in cash?
For most people it would take decades. So why stay in a home that is $100,000 underwater through no fault of anyone except the bank that lent your neighbors more than they could afford?
Banks have come to realize this. Banks who historically have been staffed by the best number crunchers in the world have been forced to come to grips that they themselves created this mess and punishing the home owner further does nothing more than hurt the bank as well. By working with home owners that they can reduce the number of bank owned foreclosures and therefore reduce the number of homes they were forced to sell below market which actually has somewhat stabilized the negative effect on the market as a whole and their inventory in particular.
Even as more homeowners fall behind on their payments due to the many things that have come together to create the longest financial slump in history, bank owned foreclosures are stabilizing as they try to work out payment plans with homeowners. Many statistics will indicate that more Americans are behind on their mortgages than ever before, but it is the actions that the banks take that will determine if bank owned foreclosures will increase or will they increase the amount of flexibility that they have recently shown in order to help stabilize the market?
Florida has seen one of the most dramatic spikes in the number of homes that have been foreclosed upon over the last three years. The transitory nature of warm weather states is part of the reason but the economy of florida is the cruxt of the problem. Searching the available free Florida foreclosure listings on USHUD.com the average price indicates that the average foreclosure home is priced below the national average.
These free Florida foreclosure listings illustrate that the majority of foreclosures are in middle class neighborhoods. Middle income homes do not indicate that second homes are the issue but that low employment figures are the reason for the spike. Florida’s current unemployment hovers between 9.5 and 10.5 which is higher than the national average. Joblessness has been historically the driver of foreclosures even before the housing market imploded in 2008.
High end homes are not immune to foreclosure as seen in this newly constructed waterfront foreclosure in Jupiter, Florida priced at $3.5 million. However this is not the average foreclosure home found on USHUD.com as under the category of free Florida foreclosure listings. Waterfront homes and larger second homes represent less than 10% of the overall foreclosure market. The foreclosure market in Florida is best reflected by the average home price in the state which is a low compared to the national average at $120,000.
Until the employment situation improves in the Sunshine State the housing market will not improve and the number of free Florida foreclosure listings on USHUD.com will continue to increase. Other states in the south east have seen a rise in manufacturing and service based industries. South Carolina, Georgia and other south eastern states enjoy the benefits of having a higher number of military installations and have built high tech hubs. These states will rebound more quickly than Florida whose economy has been tourism and agriculturally based for decades.
The downward spiral continues as Floridians leave the state in search of work. This is the opposite of what Florida has grown accustomed to over the past half century. In the past the population of Florida grew each year as retirees either moved there permanently or became snow birds. Migrating out of Florida is a recent phenomenon. Florida had over 300,000 vacant homes in 2009 most of which have appeared or will appear on USHUD.com labeled as free Florida foreclosure listings.
Oliver Stone wrote and directed the sequel to his masterpiece based on the financial corruption and excess of the American capitalistic system. Released in 1987, Wall Street stars a young and likable Charlie Sheen and a healthy and vibrant Michael Douglas. Granted the film does not deal directly with Real Estate foreclosures but it does bring to light the way in which our economic downturns are not born out of good intentions and deference to the system that allows the money changers and digital paper pushers on Wall Street to accumulate the wealth that we provide which caused millions of Real Estate foreclosures.
Real Estate foreclosures are an unintended and inconsequential consequence of the decisions and actions of many people in many categories along the way. Owning a home suddenly goes from being an essential part of the American Dream to someone’s personal nightmare. Wall Street is an allegory for what has transpired in many different times in the financial history of the world. Charlie Sheen plays a young idealist, raised in a middle class family living in a middle class neighborhood as he tries to climb the ropes of a financial investment firm. All is hard work and long hours until he finds the secret that it seems only Michael Douglas’ Gordon Gecco is aware of in 1987. Cheating is better than playing the game fairly.
I remember watching the film for the first time the year that it came out. I thought Charlie was the coolest, luckiest guy I had ever seen. When Charlie shares his insider secrets with Michael Douglas he receives a massive windfall, I thought “Hey if he didn’t do it someone else would” And in the last part of the film when Charlie’s father (played by Charlie’s real father) disowns his son and boasts of his blue collar lifestyle and how Michael Douglas (Gecco) represents the ugly side of human nature, I thought “Poor but proud?….idiot”
The latest version of greed gone wild was in the fall of 2008 when after years of dealing with the hot potato of subprime mortgages we all got left holding a spud of incomprehensible temperature. If only we had all been forced to watch Wall Street we may have caught on to the scam, maybe not? We were all too busy watching our 401k’s going up and our homes appreciating and buying larger homes and feeling way too good to call the scammers out for what they were doing. I knew it was a bad idea to give mortgages to people that could not pay them. Surely I am not the only one that knew this.
Now we want to call the scumbag brokers and their scummier scumbag bosses crooks and thieves, but did we not all have a hand in the financial house of cards collapsing and the real estate foreclosures that preceded it? Real Estate foreclosures did not start occurring after the financial meltdown. The high number of Real Estate foreclosures brought attention to it. Then once the cat was out of the bag and we discovered that the whole country was over leveraged the brokers pulled their cash out and left us paying for mortgages on houses that were only worth a fraction of their debt and more real estate foreclosures occurred and the cascading effect brought us back to our senses.
Just like Charlie Sheen’s character we were fooled and used and manipulated and we went along with it until it became uncomfortable and then we want to blame the crooks that we followed all the way through until they were forced to admit they were crooks. Then the movie is over, but instead of Michael Douglas going to jail in this version. The real life version, he got a government bailout and now lives in the South of France.
Ushud.com reviews the future of foreclosed homes in the next 24 months and the real estate market in general and we are very optimistic that the market will once again shift towards a brighter picture for those that own homes now that are either at a break- even point or perhaps over mortgaged due to the collapse of the real estate market which began in 2008. As covered in a previous post the banks and lending institutions have seen the error in their ways. Not the error that had them over extended in the credit default arena, but their second major mistake of foreclosing fast and hard in order to liquidate the toxic assets they carried on their books because of it.
Foreclosure homes sky rocketed after the banking collapse as banks and other financial institutions attempted to purge their systems of the non-performing loans that were on their books. This did little more than increase the likelihood of other homes, homes that were not in trouble going to default and eventually showing up as foreclosure homes on the books of the very same mortgage lenders that were trying to clear their books of these assets in the first place. It was like sitting in a chair and trying to lift yourself of the ground by pulling on the seat of the chair. Just keep pulling harder and you might make it off the ground….but you won’t and they didn’t either.
They just created a greater depression in the market and for all their MBA’s and PHD’s they couldn’t figure out how to get out of the box they put themselves and the rest of the world into. Foreclosure homes which historically covered by all the performing loans which paid the mortgage on time and the mortgage insurance were now being over whelmed by the incredible number of foreclosure homes that were being created by the banks unwillingness to accept their situation and just made it worse. Robosigning and other scandals aside it was just bad business to foreclose on as many homes as you could in order to get them off of your books.
Ushud.com reviews the situation and even though the banking model has been broken it is going to slowly repair itself as the pendulum had swung so far to the “Lend everyone” side it was inevitable that it swung the other way to the “Don’t lend anyone” side of the arc. Now that unemployment figures are beginning to recede and the storm seems to be subsiding foreclosure homes will remain on the market but the speed and volume of the foreclosures hitting the market will now begin to slow and people living in their parent house for the last several years will come into the market in greater numbers and buy homes. This will in turn allow the people that have wanted a larger home for their growing families to move up and the cycle will continue. We just need a little faith and common sense will rule at the end of the day.
The number of foreclosed homes continues to increase faster than the housing market can keep up. The real estate market which we have all been made all too aware of continues to lag behind historic figures even though the housing market has seen a stabilizing effect in most states and an increase in a some areas that were least effected in the housing collapse of 2008.
But is it a fair comparison to look at the inflated market that preceded the mortgage meltdown and compare that to the current market which is based on providing mortgages to home buyers that are being made to qualify for a home before they buy it? (new concept)
Unfortunately it makes better headlines and sells more television commercials to compare the insanity that created millions of foreclosed homes to the calm after the real estate storm. In the first quarter of 2008 there were 141,000 homes sold. In the fourth quarter of the same year the number was nearly halved with 85,000 homes sold. That was the beginning of the end of the housing boom and since 2010 we have not seen the number of transactions exceed 100,000 units in any quarter.
The old sports adage of “Give me consistently bad over inconsistently great anytime” comes to mind. This is because we can plan our lives around consistency, even if it is considered bad. But inconsistent volatility is impossible to plan or forecast for. So now that we have had several years of annual sales numbers which are consistent banks can plan and the foreclosure homes that are spilling into the market are no longer a shock. Foreclosure homes have represented between 40% and 45% of number of homes sold for the past two years and will remain at this figure until the number homes sold annually increases faster than the number of foreclosed homes.