A deficiency judgment can occur when a property sells for less than the current loan balance against the property. For example, if a home sells for $200,000 when the loan balance is $250,000, there will be a $50,0000 deficiency (or more, because there will also be costs of sale the lender will need to cover.)
This can occur either as a short sale (the owner sells the home with approval of the lender) or as a foreclosure (the lender takes the home back from the homeowner and sells it).
If the lender has a deficiency, in many cases they have the right to pursue that amount from the previous homeowner. In the past, lenders rarely tried to collect deficiency judgments, but as the article below explains, they are starting to now. Or they are selling that deficiency collection right to another company, such as a collection agency, and those agencies are pursuing the deficiency from the previous homeowner.
These deficiency rights vary by state and there are some ways to avoid the collection. Call me to discuss if you are contemplating a short sale or giving up your property to the lender.
Lenders go after money lost in foreclosures
By Dina ElBoghdady
Washington Post Staff Writer
Wednesday, June 16, 2010; A11
After the bank foreclosed on Fernando Palacios's Gainesville home in March, he thought he was done with what he described as the most stressful financial situation of his life.
The bank sold the home for far less than Palacios owed on it, as often happens with foreclosures. What Palacios did not see coming was the letter from his lender demanding that he pay the shortfall: $148,064.02. "I really thought I was through with this house," said Palacios, who fell behind on payments when the economy soured and his cleaning business stumbled.
Over the past year, lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales, creating more grief for people who thought their real estate headaches were far behind.
In many localities -- including Virginia, Maryland and the District -- lenders have the right to pursue borrowers whose homes have sold at a loss to collect the difference between what the property sold for and what the borrower owed on it, also called a deficiency.
Before the housing bust, when the volume of foreclosures was relatively low, lenders seldom bothered to chase after deficiencies because borrowers had few remaining assets to claim and doing so involved hassles and costs. But with foreclosures soaring, lenders are more determined to get their money back, especially if they suspect borrowers are skipping out on loan they could afford, an increasingly common practice in areas where home values have tanked.
Palacios said he was committed to staying in his house, which he bought in 2005. He sunk $20,000 into improving it and hoped to raise his children there. But his lender refused to modify his loan, he said. To avoid personal liability for the deficiency, Palacios is filing for bankruptcy protection, as many people do who are in similar situations, said Nancy Ryan, his bankruptcy attorney.
"I am definitely seeing more people come through my door who walked away from houses a year or two ago and thought they were as free as the dead," Ryan said. "They're stunned when they realize they're not."
Several lenders contacted for this story declined to say how often they pursue deficiencies. But many said they try to collect the debt if they conclude the borrower can repay all or part of it.
"Lenders are not going after people who face a hardship," said John Mechem, a spokesman for the Mortgage Bankers Association. "If they can't pay their mortgage because they have a loss of income, there is no point in going after them."
Those who had a second mortgage, such as a home-equity line of credit, in addition to their primary mortgage may find themselves particularly vulnerable, especially if they tapped into the equity line for cash.
Second lenders are last in line to get paid when a distressed property is sold. There's usually little or no money left over for them, making it more likely that they will pursue large deficiencies, several attorneys said.
Gretchen Somers said she and her husband understood the risks last year when they completed a "short sale," a transaction that allowed them to sell their Manassas home for about $150,000 less than they owed on it. But they felt they had no other options.
Somers said her family hung onto the house as long as possible. They tried but failed to sell it when her husband was transferred to Arizona for his job in early 2006, just as home prices were softening. They moved back into the house then tried to sell it again in 2008, after their adjustable-rate mortgage reset and their monthly mortgage payment nearly doubled. But home prices had plunged further by then, making it even tougher to sell.
Last year, their first lender and their home-equity line lender granted permission for the short sale. But the second lender reserved the right to come after the couple. Six months later, a collection agency called demanding $85,000 for related losses.
In hindsight, Somers said she and her husband should have just walked away from the house. "We took care of the house because we wanted it to sell," Somers said. "If they were going to come after us anyway, we shouldn't have done them the favor of making sure it looked good and cutting the grass even after we moved out, We should have mailed them the key and said: 'Here you go.' "
Carlos Cortez and his wife managed to escape that fate after their second lender came after them for $70,000 when their short sale was completed on his Manassas Park townhouse in 2008.
Cortez knew that was a possibility, but he went through with the sale because his real estate agent said the lender was engaging in scare tactics.
James Scruggs, an attorney at Legal Services of Northern Virginia, said the lender appears to have backed off after Cortez argued that that the loan officer falsely qualified him and his wife for a home-equity line by fabricating key details about their finances.
A handful of states do not allow lenders to pursue deficiencies, nor does a federal program that took effect April 10. Lenders participating in that initiative are paid for approving short sales and as a condition, they cannot go after outstanding debt.
In many states, lenders can go after deficiencies, though laws vary widely, said John Rao, an attorney at the National Consumer Law Center. Some states limit how long the banks have to file a claim or collect the debt. Others may calculate deficiencies based on the fair-market value of the house, Rao said. For instance, if a home sells for $200,000 yet its fair market value is $250,000, "the borrower who owes $240,000 on the mortgage would not have a deficiency," he said.
Borrowers should get a waiver in writing from their lenders to protect themselves, said Diane Cipollone, an attorney at the nonprofit Civil Justice. "Nobody should assume the deficiency is forgiven," she said.
Wednesday, June 16, 2010
Tuesday, June 15, 2010
Insider Short Sales Secrets Revealed
Why learn about short sales?
There are a lot of short sales on the market right now and more coming. Lenders are being pressured by the federal government to pursue loan modifications and short sales instead of foreclosures.
If you are a homeowner, who owes more on your loan than your home is worth, if you want to sell, it will need to be a short sale.
Advantages of a short sale instead of a foreclosure for the homeowner:
• Provides some control over the process. (Not a lot more, but some.)
• May provide some financial incentive to the owner. (Rarely, but it does happen.)
• Preserves personal dignity. (No public posting of foreclosure sale notice.)
• Less of a hit to your credit score.
• Less time before your can buy a new home.
• The short payoff can help preserve the neighborhood market values.
Advantages of a short sale for a buyer:
• More homes available.
• Less competition (many Realtors and buyers will avoid short sales.)
• Possible lower price than for a private sale.
Insider info:
I recently attended 2 events with insiders on both sides of the short sale scene: one event featured a lender's representative and the other event had an title company escrow/negotiator representative, who represents homeowner/sellers. They confirmed some things I knew from previous events and also revealed some new information.
First some definitions for the purposes of this article:
Short sale: a sale of a property is made for less than the current loan balance. For example, if there is a loan on a property for $200,000, but the current market value and offer to purchase the property is $150,000, the payoff to the lender will be $50,000 less than the loan amount (minus also all costs of sale.)
Homeowner/seller: person on the title (legal record) as the owner.
Loan originator: the company who originally signs-up the home-owner for a loan. This can be a mortgage broker, who could represent many different lenders, or a lender, such as Well Fargo Bank.
Loan servicer: This is a company, who services the loan. They collect payments, etc. This may be the loan originator, the original lender, or another company.
The lender/investor: This is a company or individual, who ends up "holding the paper" – the owner of the mortgage. This might be the original lender, but most lenders resell their loans to another investor, a government agency, or another financial institution such as a securities firm. Loans can also be packaged with other loans to create a "securitization" of the loan and that security can be resold several times.
The owner’s representative: The processing of the short sale may be long and difficult.
• It is almost impossible for an owner to do it and even Realtors do not have the specialized knowledge and time to be consistently successful.
• The listing Realtor may have someone in their office, who can do it (we do.)
• Many title companies now have specialists, who can handle the processing, but they cannot negotiate with the lender/investor.
• A third party negotiator or another representative may both process the paperwork and negotiate with the servicer.
The short sale process: (in brief)
1. The property is listed with a Realtor for sale by the owner.
2. An offer to purchase is made by a buyer and is accepted by the owner.
3. The offer is submitted to the servicer for approval, along with a complete file of information about the owner, the reasons they qualify for the short sale, etc.
4. The servicer assigns a negotiator to evaluate the file and approve it or not.
5. If necessary, the servicer submits the deal to the lender/investor for approval
6. There may be more negotiations necessary to get final approval
Whew! Sorry, for all of the detail, but you have to know the players to understand the game.
What you should know about the short sale process.
Servicer/lender policies and procedures are constantly changing, their personnel are constantly changing and lender/investor rules are generally unknowable, all making for typically an incredibly frustrating processes.
According to the lender's representative I heard speak, (let’s call him by the code name “Mr. L,” he has the best and most successful processing and closing available. He may just be right, but unfortunately he only manages the short sales for one lender's portfolio loans, (the loans they have kept in their own account.) He does not deal with their investor loans (loans they service, but have sold to another investor.) Only about 10% of the loans they service are their own portfolio loans.
As described by the title company owner’s representative, other servicer/lenders are not as good, some much, much worse. Here are some comparisons.
Insider info:
L’s company’s internal calculation is that the lender/investor will recover 10% more money approving a typical short sale instead of foreclosing on a property.
So, why is it so hard to get a short sale approved? (Keep reading and you will learn some possible reasons.)
The journey of the short sale file:
1. Your representative submits a package of information (a file) to the lender servicer’s Set-up person:
• L’s lender representative provides local processing and approvals. Most big lenders only have remote processing centers in far away states, usually staffed with people, who may have just been hired and have little knowledge of what is going on.
• They make sure the file is complete.
• If the file is incomplete, they may just shred it. It might be missing only one piece of information (maybe some information that no one has previously required) but it will be too difficult to keep track of and update. So, they will ask for a new complete package.
• The processor person may be new or poorly trained and mess up the process.
• Your file may be lost….several times….during the process. This is common.
• L’s response time at any stage of the process is 7 to 10 business days. (The industry average is more like 2-3 weeks.)
When complete, your file goes to -
2. The Negotiator:
• Processing: They may have several hundred files and take several weeks to get to yours. Then, it gets maybe 5 minutes of review.
o By the time the file is considered, the docs may be too dated. They will request new docs and your file goes to the end of the line. (This can happen more than once.)
o If the file is incomplete (by their latest standards which may be new and unknown) you will get a request for more info and your file goes to the end of the line.
o If there are questions, they may ask for clarification or may just trash the file. (Too much work.)
• Valuation/negotiation:
o Review of the purchase offer: the lender/investor want the highest possible net return and the best chance of closing the deal. So sometimes they will accept an all-cash offer, which is lower than an offer requiring financing.
• The lender/investor will have someone do a valuation of the property to determine if the purchase offer they have is reasonable given the current market.
o May use out-of-town appraiser or Realtor who does not know the local market.
o May do a desktop appraisal (just look at computer reports) or a drive by. Rarely will they find out about interior condition or possible anomalies.
o Valuations can be way off.
Completed package will be submitted to the lender/investor.
3. Investor evaluation:
• The servicer will not reveal the investor’s requirements. It may be that you go through the entire process and the investor will not allow a short sale.
• The investor may have mortgage insurance, which will cover their loss in the case of a foreclosure, but not a short sale, so they will deny a short sale, foreclose on the property and put it on the market, sometimes even at a lower price point than the short sale offer price!
• Sometimes, it will take them a long time to approve the deal. They may only meet to consider files quarterly.
• If there is a second loan or equity line on the property
o Lender/investors in first position know the second loan is not worth anything if the property is sold at foreclosure, but the second lender may demand a payoff anyway to approve the short sale.
o L says he will pay 10 to 15% to a second mortgage holder. Others will typically pay nothing toward a second mortgage, but may pay something depending upon the circumstances.)
o Sometimes this stalemate will prevent the short sale from being approved and the property will end up going to foreclosure.
• The bottom line for the lender/investor is how will they recover the most money?
Loan modification, short sale, foreclosure? That is the option they will take.
The closing: completion of the sales transaction
• L’s average timing from application to closing is 37 business days. (The typical short sale takes 3-4 months and can often take over a year. (If it takes that long, in 4 out of 5 cases the original buyer is long gone and you have to hope to have a back-up offer in hand.)
• Deficiency and other issues: This is a big deal and a more complicated subject than we can explain in detail here, but here are some basics.
o Your short sale can be accepted, but with the provision that the owner will contribute a promissory note for the lender’s loss.
o If the loan is not the original purchase money loan, the lender can reserve the right to come after the owner for any amount that they are short from their loan balance.
o If there is a deficiency provision in your short sale agreement, for example, if your home sells for $50,000 less than the mortgage balance, they can present you with a bill for the $50,000 sometime in the future. They may even sell the note to an aggressive collection agency to come after you. Many owners will not sign that deal.
• Sometimes, the lender may have a quota and just accept a certain number closes per month. If that is so, you have to wait your turn. That’s it.
• L says he closes 70% of his short sales. The industry average is 36%.
So, short sales can be done, but up until now, it has been a difficult process most of the time.
However, there is some additional hope. The new government HAFA program has mandated more standardized processes and procedures for short sales. Time will tell if the lenders manage to implement them.
There are a lot of short sales on the market right now and more coming. Lenders are being pressured by the federal government to pursue loan modifications and short sales instead of foreclosures.
If you are a homeowner, who owes more on your loan than your home is worth, if you want to sell, it will need to be a short sale.
Advantages of a short sale instead of a foreclosure for the homeowner:
• Provides some control over the process. (Not a lot more, but some.)
• May provide some financial incentive to the owner. (Rarely, but it does happen.)
• Preserves personal dignity. (No public posting of foreclosure sale notice.)
• Less of a hit to your credit score.
• Less time before your can buy a new home.
• The short payoff can help preserve the neighborhood market values.
Advantages of a short sale for a buyer:
• More homes available.
• Less competition (many Realtors and buyers will avoid short sales.)
• Possible lower price than for a private sale.
Insider info:
I recently attended 2 events with insiders on both sides of the short sale scene: one event featured a lender's representative and the other event had an title company escrow/negotiator representative, who represents homeowner/sellers. They confirmed some things I knew from previous events and also revealed some new information.
First some definitions for the purposes of this article:
Short sale: a sale of a property is made for less than the current loan balance. For example, if there is a loan on a property for $200,000, but the current market value and offer to purchase the property is $150,000, the payoff to the lender will be $50,000 less than the loan amount (minus also all costs of sale.)
Homeowner/seller: person on the title (legal record) as the owner.
Loan originator: the company who originally signs-up the home-owner for a loan. This can be a mortgage broker, who could represent many different lenders, or a lender, such as Well Fargo Bank.
Loan servicer: This is a company, who services the loan. They collect payments, etc. This may be the loan originator, the original lender, or another company.
The lender/investor: This is a company or individual, who ends up "holding the paper" – the owner of the mortgage. This might be the original lender, but most lenders resell their loans to another investor, a government agency, or another financial institution such as a securities firm. Loans can also be packaged with other loans to create a "securitization" of the loan and that security can be resold several times.
The owner’s representative: The processing of the short sale may be long and difficult.
• It is almost impossible for an owner to do it and even Realtors do not have the specialized knowledge and time to be consistently successful.
• The listing Realtor may have someone in their office, who can do it (we do.)
• Many title companies now have specialists, who can handle the processing, but they cannot negotiate with the lender/investor.
• A third party negotiator or another representative may both process the paperwork and negotiate with the servicer.
The short sale process: (in brief)
1. The property is listed with a Realtor for sale by the owner.
2. An offer to purchase is made by a buyer and is accepted by the owner.
3. The offer is submitted to the servicer for approval, along with a complete file of information about the owner, the reasons they qualify for the short sale, etc.
4. The servicer assigns a negotiator to evaluate the file and approve it or not.
5. If necessary, the servicer submits the deal to the lender/investor for approval
6. There may be more negotiations necessary to get final approval
Whew! Sorry, for all of the detail, but you have to know the players to understand the game.
What you should know about the short sale process.
Servicer/lender policies and procedures are constantly changing, their personnel are constantly changing and lender/investor rules are generally unknowable, all making for typically an incredibly frustrating processes.
According to the lender's representative I heard speak, (let’s call him by the code name “Mr. L,” he has the best and most successful processing and closing available. He may just be right, but unfortunately he only manages the short sales for one lender's portfolio loans, (the loans they have kept in their own account.) He does not deal with their investor loans (loans they service, but have sold to another investor.) Only about 10% of the loans they service are their own portfolio loans.
As described by the title company owner’s representative, other servicer/lenders are not as good, some much, much worse. Here are some comparisons.
Insider info:
L’s company’s internal calculation is that the lender/investor will recover 10% more money approving a typical short sale instead of foreclosing on a property.
So, why is it so hard to get a short sale approved? (Keep reading and you will learn some possible reasons.)
The journey of the short sale file:
1. Your representative submits a package of information (a file) to the lender servicer’s Set-up person:
• L’s lender representative provides local processing and approvals. Most big lenders only have remote processing centers in far away states, usually staffed with people, who may have just been hired and have little knowledge of what is going on.
• They make sure the file is complete.
• If the file is incomplete, they may just shred it. It might be missing only one piece of information (maybe some information that no one has previously required) but it will be too difficult to keep track of and update. So, they will ask for a new complete package.
• The processor person may be new or poorly trained and mess up the process.
• Your file may be lost….several times….during the process. This is common.
• L’s response time at any stage of the process is 7 to 10 business days. (The industry average is more like 2-3 weeks.)
When complete, your file goes to -
2. The Negotiator:
• Processing: They may have several hundred files and take several weeks to get to yours. Then, it gets maybe 5 minutes of review.
o By the time the file is considered, the docs may be too dated. They will request new docs and your file goes to the end of the line. (This can happen more than once.)
o If the file is incomplete (by their latest standards which may be new and unknown) you will get a request for more info and your file goes to the end of the line.
o If there are questions, they may ask for clarification or may just trash the file. (Too much work.)
• Valuation/negotiation:
o Review of the purchase offer: the lender/investor want the highest possible net return and the best chance of closing the deal. So sometimes they will accept an all-cash offer, which is lower than an offer requiring financing.
• The lender/investor will have someone do a valuation of the property to determine if the purchase offer they have is reasonable given the current market.
o May use out-of-town appraiser or Realtor who does not know the local market.
o May do a desktop appraisal (just look at computer reports) or a drive by. Rarely will they find out about interior condition or possible anomalies.
o Valuations can be way off.
Completed package will be submitted to the lender/investor.
3. Investor evaluation:
• The servicer will not reveal the investor’s requirements. It may be that you go through the entire process and the investor will not allow a short sale.
• The investor may have mortgage insurance, which will cover their loss in the case of a foreclosure, but not a short sale, so they will deny a short sale, foreclose on the property and put it on the market, sometimes even at a lower price point than the short sale offer price!
• Sometimes, it will take them a long time to approve the deal. They may only meet to consider files quarterly.
• If there is a second loan or equity line on the property
o Lender/investors in first position know the second loan is not worth anything if the property is sold at foreclosure, but the second lender may demand a payoff anyway to approve the short sale.
o L says he will pay 10 to 15% to a second mortgage holder. Others will typically pay nothing toward a second mortgage, but may pay something depending upon the circumstances.)
o Sometimes this stalemate will prevent the short sale from being approved and the property will end up going to foreclosure.
• The bottom line for the lender/investor is how will they recover the most money?
Loan modification, short sale, foreclosure? That is the option they will take.
The closing: completion of the sales transaction
• L’s average timing from application to closing is 37 business days. (The typical short sale takes 3-4 months and can often take over a year. (If it takes that long, in 4 out of 5 cases the original buyer is long gone and you have to hope to have a back-up offer in hand.)
• Deficiency and other issues: This is a big deal and a more complicated subject than we can explain in detail here, but here are some basics.
o Your short sale can be accepted, but with the provision that the owner will contribute a promissory note for the lender’s loss.
o If the loan is not the original purchase money loan, the lender can reserve the right to come after the owner for any amount that they are short from their loan balance.
o If there is a deficiency provision in your short sale agreement, for example, if your home sells for $50,000 less than the mortgage balance, they can present you with a bill for the $50,000 sometime in the future. They may even sell the note to an aggressive collection agency to come after you. Many owners will not sign that deal.
• Sometimes, the lender may have a quota and just accept a certain number closes per month. If that is so, you have to wait your turn. That’s it.
• L says he closes 70% of his short sales. The industry average is 36%.
So, short sales can be done, but up until now, it has been a difficult process most of the time.
However, there is some additional hope. The new government HAFA program has mandated more standardized processes and procedures for short sales. Time will tell if the lenders manage to implement them.
Demographics Determine Destiny - At Least for Real Estate Prices
One of the most basic law of economics is "supply and demand." If there is more demand than supply, prices will rise. If there is more supply than demand, prices will fall.
The main driver of demand for real estate has historically been population growth and more specifically household formation. More new households menans more demand for new homes and rental houses.
This is a good article about how household formation (demand) has been restricted by the current recession, but so has new home-building (supply.) When the econoomy turns around, there will be a pent-up demand for new and rental homes and the building industry will probably be slow to respond, leading to price appreciation in some markets. Of course, we would need to factor in job growth and financing availability to complete the picture.
Is a housing
shortage coming?
By Les Christie, staff writer
June 15, 2010: 2:08 PM ET
NEW YORK (CNNMoney.com) --
As the nation struggles to shrug off the worst
housing crash since the Great Depression, it
may be hard to believe a housing shortage
could be on its way.
The nation is simply not building enough
homes to keep up with potential demand.
Just 672,000 new homes were started in
April, an annualized rate and less than half
the long-term run rate needed to meet the
nation's natural population growth.
"It is ironic, but there is a growing
consensus that there may be a new housing
shortage coming," said James Gaines, a real
estate economist with Texas A&M.
So far, the shortfall has been masked by a
weak economy that has put a damper on
home buying. Once the job market
rebounds, however, people will look to have
their own homes again. This pent-up
demand could get unleashed on unprepared
markets, causing shortages and rising local
prices.
Household formation -- the technical term
for people moving in together -- has been
on hold during the past few years as young
people, especially, have been unable to find
jobs. In the past, an average of more than
1.3 million households were formed each
year, causing demand for 1.5 million new
homes. (More homes than households are
needed to replace those destroyed by fires,
floods, teardowns and neglect.)
In 2009, only 398,000 new households were
formed, according to the Census Bureau.
That is much lower than average and a
quarter of the number formed just two years
earlier.
"The decline in household formation is
artificial," said Gaines. "The young are
moving in with their parents. There's even
doubling up among working class people.
There's a pent-up demand coming if and
when the economy recovers."
Those doubting a new bubble is near point
to a large inventory overhang. As many as 7
million homes are vacant but not for sale,
according to the Census Bureau, which
should provide cushion to offset increased
demand.
"The housing market hasn't been this way
before," said Nicolas Retsinas, director of
Harvard's Joint Center for Housing Studies.
"The gravity of the problem is deeper and
the challenges different. You have to get
through that inventory."
The inventory number, however, can be
deceiving for two reasons: People may not
want to live in hard-hit areas where the
houses are (think: California exurbs and
Detroit neighborhoods) or the homes may
be beyond repair.
"Many of these vacant homes may not be
habitable or are in locations where nobody
wants to live," Gaines said.
Ordinarily, the nation's homebuilders can
react quickly to meet surges in demand. But
several factors are preventing them from
being nimble. The biggest is the difficulty
getting loans, according to Jerry Howard,
CEO of the National Association of Home
Builders (NAHB).
"When we came out of past recessions, there
wasn't the difficulty of obtaining financing
that there is now," he said.
Many small builders have been unable to
obtain construction loans or lost their
financing in mid-project. That has prodded
NAHB to support federal legislation that
would make $15 billion in lending
guarantees available for private builders.
Hard times also persuaded builders to
postpone purchases of land they could prep
for future development. It will take them that
much longer to gear up production once the
housing market improves.
Too, many builders went out of business in
the bust, so there will be fewer companies
out there to do the building. The survivors
will confront a transformed regulatory
environment, according to Howard, that will
make new homes harder to build and more
expensive.
"There is an increased focus on smart
growth that will create regulatory barriers to
the kind of sprawling development that has
characterized a lot of recent building," said
Retsinas.
The regulations come under two categories,
according to Susan Asmus, NAHB's senior
vice president for advocacy, covering where
new homes are built and how they're built.
One category is storm water runoff. The
Environmental Protection Agency tightened
requirement governing how builders handle
that. Builders will have to install controls
such as catchments or retaining ponds that
slow the flow of storm runoff into the local
watersheds.
"It could add as much as $15,000 to $30,000
an acre in extra costs, depending on the
soil," said Asmus.
Another proposed regulation mandates
sprinkler systems in each new home. This is
already state law, starting January 2011, in
California, Maryland and New Jersey. That
adds as much as $10,000 to the cost of
construction.
Previous overbuilding one-time boom
towns, such as Las Vegas and Miami, should
provide enough inventory of like-new homes
to counter any strong pent-up demand that
breaks free.
It's the more constrained markets, where it's
particularly hard to build -- such as New
York, San Francisco and Seattle -- that will
field the bulk of the new bubble problems,
according to Retsinas. He, however, is less
worried about the purchase market than
about rentals, the usual entree for the young
buyers expected to lead the new housing
market charge.
"Nobody is building any rental inventory,"
said Retsinas.
The main driver of demand for real estate has historically been population growth and more specifically household formation. More new households menans more demand for new homes and rental houses.
This is a good article about how household formation (demand) has been restricted by the current recession, but so has new home-building (supply.) When the econoomy turns around, there will be a pent-up demand for new and rental homes and the building industry will probably be slow to respond, leading to price appreciation in some markets. Of course, we would need to factor in job growth and financing availability to complete the picture.
Is a housing
shortage coming?
By Les Christie, staff writer
June 15, 2010: 2:08 PM ET
NEW YORK (CNNMoney.com) --
As the nation struggles to shrug off the worst
housing crash since the Great Depression, it
may be hard to believe a housing shortage
could be on its way.
The nation is simply not building enough
homes to keep up with potential demand.
Just 672,000 new homes were started in
April, an annualized rate and less than half
the long-term run rate needed to meet the
nation's natural population growth.
"It is ironic, but there is a growing
consensus that there may be a new housing
shortage coming," said James Gaines, a real
estate economist with Texas A&M.
So far, the shortfall has been masked by a
weak economy that has put a damper on
home buying. Once the job market
rebounds, however, people will look to have
their own homes again. This pent-up
demand could get unleashed on unprepared
markets, causing shortages and rising local
prices.
Household formation -- the technical term
for people moving in together -- has been
on hold during the past few years as young
people, especially, have been unable to find
jobs. In the past, an average of more than
1.3 million households were formed each
year, causing demand for 1.5 million new
homes. (More homes than households are
needed to replace those destroyed by fires,
floods, teardowns and neglect.)
In 2009, only 398,000 new households were
formed, according to the Census Bureau.
That is much lower than average and a
quarter of the number formed just two years
earlier.
"The decline in household formation is
artificial," said Gaines. "The young are
moving in with their parents. There's even
doubling up among working class people.
There's a pent-up demand coming if and
when the economy recovers."
Those doubting a new bubble is near point
to a large inventory overhang. As many as 7
million homes are vacant but not for sale,
according to the Census Bureau, which
should provide cushion to offset increased
demand.
"The housing market hasn't been this way
before," said Nicolas Retsinas, director of
Harvard's Joint Center for Housing Studies.
"The gravity of the problem is deeper and
the challenges different. You have to get
through that inventory."
The inventory number, however, can be
deceiving for two reasons: People may not
want to live in hard-hit areas where the
houses are (think: California exurbs and
Detroit neighborhoods) or the homes may
be beyond repair.
"Many of these vacant homes may not be
habitable or are in locations where nobody
wants to live," Gaines said.
Ordinarily, the nation's homebuilders can
react quickly to meet surges in demand. But
several factors are preventing them from
being nimble. The biggest is the difficulty
getting loans, according to Jerry Howard,
CEO of the National Association of Home
Builders (NAHB).
"When we came out of past recessions, there
wasn't the difficulty of obtaining financing
that there is now," he said.
Many small builders have been unable to
obtain construction loans or lost their
financing in mid-project. That has prodded
NAHB to support federal legislation that
would make $15 billion in lending
guarantees available for private builders.
Hard times also persuaded builders to
postpone purchases of land they could prep
for future development. It will take them that
much longer to gear up production once the
housing market improves.
Too, many builders went out of business in
the bust, so there will be fewer companies
out there to do the building. The survivors
will confront a transformed regulatory
environment, according to Howard, that will
make new homes harder to build and more
expensive.
"There is an increased focus on smart
growth that will create regulatory barriers to
the kind of sprawling development that has
characterized a lot of recent building," said
Retsinas.
The regulations come under two categories,
according to Susan Asmus, NAHB's senior
vice president for advocacy, covering where
new homes are built and how they're built.
One category is storm water runoff. The
Environmental Protection Agency tightened
requirement governing how builders handle
that. Builders will have to install controls
such as catchments or retaining ponds that
slow the flow of storm runoff into the local
watersheds.
"It could add as much as $15,000 to $30,000
an acre in extra costs, depending on the
soil," said Asmus.
Another proposed regulation mandates
sprinkler systems in each new home. This is
already state law, starting January 2011, in
California, Maryland and New Jersey. That
adds as much as $10,000 to the cost of
construction.
Previous overbuilding one-time boom
towns, such as Las Vegas and Miami, should
provide enough inventory of like-new homes
to counter any strong pent-up demand that
breaks free.
It's the more constrained markets, where it's
particularly hard to build -- such as New
York, San Francisco and Seattle -- that will
field the bulk of the new bubble problems,
according to Retsinas. He, however, is less
worried about the purchase market than
about rentals, the usual entree for the young
buyers expected to lead the new housing
market charge.
"Nobody is building any rental inventory,"
said Retsinas.
Wednesday, June 9, 2010
What is Happening with Short Sales and Foreclosure Sales
(My comments will be in bolded text).
This is a good explanation about how the rules for Short Sales and Foreclosure sales are both driven by the Loan Servicing Agreement on the original loan.
Several different companies may be involved with a loan.
When you get a loan to buy a property, the loan is originated by one company. That company may keep the loan in their own portfolio, or (more likely) re-sell the loan to another investment company.
Then, the loan may be serviced (payments collected, etc.) by the originating company, or the investment company, which bought the loan, or by another company, which just does loan servicing.
Short Sales
So, when there is a short sale situation (there is a pending sale for less than the loan amount) the loan servicing company may be able to make the deal to sell for the loan amount, may be prohibited from making any such deal, or may be able to make the deal only with the investment company's approval. If the loan has been resold several times or packaged with other loans, that becomes almost impossible.
Foreclosure sales
Traditionally, the minimum acceptable bid has usually been the existing loan amount. If that amount is not equaled or surpassed, the property will go back to the investor company, which holds the loan. They will then list it for sale with a Realtor.
Recently however, if a property is not habitable, due to damage, etc., that means it is almost impossible to get a new loan to buy it, so since it will only attract an all-cash offer anyway, some properties have been selling for less than the current loan amount at the foreclosure sale.
In either a Short Sale or Foreclosure Sale, there will be a "Loan Servicing Agreement" telling the company collecting the loan payments how to collect payments, what to do if payments are late or the borrower does not pay and if they can make a deal to sell at less than the loan amount.
(From the Bryan Ellis News)
The Real Truth Of Why Short Sales Are So Hard To Complete
I had a meeting this week in Las Vegas with some high net worth investors and a colleague of mine who runs a large real estate brokerage that focuses on asset management and foreclosure disposition for very large mortgage lending clients. He was explaining the process of foreclosure auctions and mentioned that the vast majority of properties that go to auction have a starting bid that matches the amount of the debt against the property. Since most foreclosures are tremendously over-leveraged, the typical auction result is the return of the property to the lender. Makes sense… nobody would want a property with massive negative equity to begin with.
Monday, June 7, 2010
Rent or Buy NY Times Writer Decides to Buy
Here is a great article about Renting vs. Buying. It does not cover all of the advantages of buying, but it is a pretty good discussion.
(Please also see my previous post Rent vs. Buy? Which Cities are Best and Worst.)
As Home Prices Drop Low Enough, a Committed Renter Decides to Buy
Rent or Buy? Which Cities are Best and Worst?
There are a lot of personal advantages of owning your own home. You can settle in without being at the mercy of a landlord and of course if you pay on your mortgage until it's term is up, you own the home free and clear. Also, you can add your own personal touches and truly make it your own.
As an investment, historically (OK, not the last couple of years!), homes have appreciated much better than inflation (especially considering the leverage of financing, etc.)
Our neighbor bought her home for $73,000 in the 1970s and even with the recent crash in prices it is still worth $350,000 or more...and she owns it free and clear! If she had been renting all of that time, she would be paying probably $1800 per months and own...nothing.
But what about the cash flow economics of buying vs. renting?
When is a real estate market affordable for buyers? The short answer is "When it is less expensive to buy than rent."
There are 2 ways to look at this: the "Rent vs. Buy Ratio" and the actual rent cost vs. market rent.
Rent vs. Buy Ratio
Some real estate experts say that when a market price of a home is 15 times the annual rental cost, it is a good value. In recent years, that has certainly not been the case in many parts of the country, including Sonoma county, but it is now.
For example, if the the price point to buy a home is $300,000, divide that number by the annual rental cost for a similar home, say $20,000 ($1666 per month times 12 months), the rental ratio would be 15.
Actual Rent vs. Market Rent
This is a more accurate analysis, because it takes into account interest rates, which are historically low at this time.
We have recently helped several people buy homes who now pay less than a comparable home would rent for.
In one example, our clients had been paying $1650 per month for a typical home. They bought a better home in the same neighborhood and now pay $1600 per month in mortgage payments. (Of course they must also pay property taxes and insurance, but the mortgage and property tax income tax deductions more or less cover those costs. And part of that $1650 they pay every month goes toward paying down that mortgage.)
Here are 2 articles about cities with the current best and worst Rent To Buy ratios in the U.S.
If you are thinking about investing in rental real estate, the cities with the best Rent to Buy ratios offer some of the best opportunities. If you are considering this, please contact us. We have contacts in those areas and we also know some of the advantages and disadvantages of investing out-of-state. For example, Florida has some low prices right now, but some of the areas in Florida are very poor rental markets and the homeowner's insurance costs are prohibitive.
San Francisco has one of the worst Rent to Own ratios at 22. So, I consider Sonoma County a good buy at this time. It is in the greater San Francisco Bay Area, but is affordable.
If you're looking for a quick and easy calculation about whether you should finally buy your dream home, you'll likely want to first check out your area's price-to-rent ratio. (For a list of 10 U.S. cities where it's better to rent than buy click here.) Trulia, the online real estate data provider, recently took a look at this hand statistic in the 50 largest U.S. cities by population. By comparing the average purchase price of a 2-bedroom home --including mortgage fees and maintenance expenses -- with the average rental price for 2-bedroom apartments, condos, and townhouses, Trulia calculated the price-to-rent ratio to determine whether it is better to rent or buy in a particular city. Cities with low price-to-rent ratios (under 15) indicate that is cheaper to own a home than rent. "At the peak of the real estate bubble, cities like Miami, Phoenix and Las Vegas were not affordable for many. Now the opposite is true," said Pete Flint, co-founder and CEO of Trulia. "Home sellers in these hard hit areas are forced to lower their prices to compete with all the foreclosures on the market. As a result, these unattainable markets are so affordable it makes better financial sense to buy than rent."
If you're enamored of the age-old wisdom that renting a home is akin
to throwing your money away, think again.
A simple calculation called the price-to-rent ratio can give you an indication of
whether it's a better move to rent or buy a home. Trulia, the online real
estate data provider, evaluated the price-to-rent ratio in the 50
largest U.S. cities by population. By comparing the average purchase
price of a 2-bedroom home -- including mortgage fees and maintenance
expenses -- with the average rental price for 2 bedroom apartments,
condos, and townhouses, Truilia came up with a handy,
back-of-the-envelope way to gauge a local market.
Cities with price-to-rent ratios between 16 and 20 indicate that is
cheaper to rent than purchase a home, but certain financial situations
may make ownership a viable option. In cities with price-to-rent ratios
of 21 and above, it is much more expensive to buy than rent.
"It is not a surprise to see cities like New York and San Francisco
on the 'Rent' cities but I was surprised to see areas like Omaha,
Oklahoma City and Kansas City on our rental list, "said Pete Flint,
co-founder and CEO of Trulia. "We're not suggesting that it's unwise to
buy in these areas though -- just that it's significantly more expensive
than renting."
"In many of these cities, even though home buying is much more costly
than renting, prices are still much lower than they have been in a
long, long time," Flint added.
As an investment, historically (OK, not the last couple of years!), homes have appreciated much better than inflation (especially considering the leverage of financing, etc.)
Our neighbor bought her home for $73,000 in the 1970s and even with the recent crash in prices it is still worth $350,000 or more...and she owns it free and clear! If she had been renting all of that time, she would be paying probably $1800 per months and own...nothing.
But what about the cash flow economics of buying vs. renting?
When is a real estate market affordable for buyers? The short answer is "When it is less expensive to buy than rent."
There are 2 ways to look at this: the "Rent vs. Buy Ratio" and the actual rent cost vs. market rent.
Rent vs. Buy Ratio
Some real estate experts say that when a market price of a home is 15 times the annual rental cost, it is a good value. In recent years, that has certainly not been the case in many parts of the country, including Sonoma county, but it is now.
For example, if the the price point to buy a home is $300,000, divide that number by the annual rental cost for a similar home, say $20,000 ($1666 per month times 12 months), the rental ratio would be 15.
Actual Rent vs. Market Rent
This is a more accurate analysis, because it takes into account interest rates, which are historically low at this time.
We have recently helped several people buy homes who now pay less than a comparable home would rent for.
In one example, our clients had been paying $1650 per month for a typical home. They bought a better home in the same neighborhood and now pay $1600 per month in mortgage payments. (Of course they must also pay property taxes and insurance, but the mortgage and property tax income tax deductions more or less cover those costs. And part of that $1650 they pay every month goes toward paying down that mortgage.)
Here are 2 articles about cities with the current best and worst Rent To Buy ratios in the U.S.
If you are thinking about investing in rental real estate, the cities with the best Rent to Buy ratios offer some of the best opportunities. If you are considering this, please contact us. We have contacts in those areas and we also know some of the advantages and disadvantages of investing out-of-state. For example, Florida has some low prices right now, but some of the areas in Florida are very poor rental markets and the homeowner's insurance costs are prohibitive.
San Francisco has one of the worst Rent to Own ratios at 22. So, I consider Sonoma County a good buy at this time. It is in the greater San Francisco Bay Area, but is affordable.
10 U.S. Cities Where It's Cheaper To Buy Than Rent
If you're looking for a quick and easy calculation about whether you should finally buy your dream home, you'll likely want to first check out your area's price-to-rent ratio. (For a list of 10 U.S. cities where it's better to rent than buy click here.) Trulia, the online real estate data provider, recently took a look at this hand statistic in the 50 largest U.S. cities by population. By comparing the average purchase price of a 2-bedroom home --including mortgage fees and maintenance expenses -- with the average rental price for 2-bedroom apartments, condos, and townhouses, Trulia calculated the price-to-rent ratio to determine whether it is better to rent or buy in a particular city. Cities with low price-to-rent ratios (under 15) indicate that is cheaper to own a home than rent. "At the peak of the real estate bubble, cities like Miami, Phoenix and Las Vegas were not affordable for many. Now the opposite is true," said Pete Flint, co-founder and CEO of Trulia. "Home sellers in these hard hit areas are forced to lower their prices to compete with all the foreclosures on the market. As a result, these unattainable markets are so affordable it makes better financial sense to buy than rent."
The Top 10 Cities Where It's Cheaper To Rent Than
Buy A Home
If you're enamored of the age-old wisdom that renting a home is akin
to throwing your money away, think again.
A simple calculation called the price-to-rent ratio can give you an indication of
whether it's a better move to rent or buy a home. Trulia, the online real
estate data provider, evaluated the price-to-rent ratio in the 50 largest U.S. cities by population. By comparing the average purchase
price of a 2-bedroom home -- including mortgage fees and maintenance
expenses -- with the average rental price for 2 bedroom apartments,
condos, and townhouses, Truilia came up with a handy,
back-of-the-envelope way to gauge a local market.
Cities with price-to-rent ratios between 16 and 20 indicate that is
cheaper to rent than purchase a home, but certain financial situations
may make ownership a viable option. In cities with price-to-rent ratios
of 21 and above, it is much more expensive to buy than rent.
"It is not a surprise to see cities like New York and San Francisco
on the 'Rent' cities but I was surprised to see areas like Omaha,
Oklahoma City and Kansas City on our rental list, "said Pete Flint,
co-founder and CEO of Trulia. "We're not suggesting that it's unwise to
buy in these areas though -- just that it's significantly more expensive
than renting."
"In many of these cities, even though home buying is much more costly
than renting, prices are still much lower than they have been in a
long, long time," Flint added.
Friday, June 4, 2010
Long Term Growth but Short Term Challenges for Sonoma County
I recently read an article titled "What To Do With The Suburbs?"
The article is too long to post here, but the main points are that there will be a lot of populations growth in the years to come and there are not many good plans in place to accommodate this growth. To quote the article:
"A panel on the history and future of the "Great American Suburb" where architect and planner David Dixon, co-author of the 2009 book, Urban Design for an Urban Century: Placemaking for People, pointed out that to accommodate predicted population growth from now until 2030, 150 billion square feet of development would be built. This growth will not and cannot all take place in revitalized cities."
"The issues facing 21st century planners will be how to deal with population growth while avoiding more sprawl at the edges, and how to prevent more decades marked by (i) disinvestment in cities and older suburbs and (ii) isolation of the disadvantaged (who may well include a huge mass of elderly Baby Boomers). The consensus among planners is that to solve these problems there need to be strategies for allowing and encouraging existing suburbs to evolve into denser versions of themselves, with more of the good qualities of cities and towns."
There are some good plans for Sonoma county to do this type of growth, (downtown Santa Rosa, Sonoma Mountain Village, etc.) but there is a lot of sensitivity to "too much growth" and a lot of development costs which will restrict building.
The quality of life is great here, so people want to move to live here. Also, the demand of local population growth will add demand. Both of these demand factors, coupled with modest development supply, should spur increases in real estate prices long term.
But short term, there are still a lot of under-water mortgages (loans amounts are higher than the current value of the property) and too many people behind on their mortgage payments. (According to the Press Democrat today, 1 in 13!) So, expect many distressed properties to be available in the short term.
Ongoing demand and a continuous supply points to an active real estate market in the coming months.
The article is too long to post here, but the main points are that there will be a lot of populations growth in the years to come and there are not many good plans in place to accommodate this growth. To quote the article:
"A panel on the history and future of the "Great American Suburb" where architect and planner David Dixon, co-author of the 2009 book, Urban Design for an Urban Century: Placemaking for People, pointed out that to accommodate predicted population growth from now until 2030, 150 billion square feet of development would be built. This growth will not and cannot all take place in revitalized cities."
"The issues facing 21st century planners will be how to deal with population growth while avoiding more sprawl at the edges, and how to prevent more decades marked by (i) disinvestment in cities and older suburbs and (ii) isolation of the disadvantaged (who may well include a huge mass of elderly Baby Boomers). The consensus among planners is that to solve these problems there need to be strategies for allowing and encouraging existing suburbs to evolve into denser versions of themselves, with more of the good qualities of cities and towns."
There are some good plans for Sonoma county to do this type of growth, (downtown Santa Rosa, Sonoma Mountain Village, etc.) but there is a lot of sensitivity to "too much growth" and a lot of development costs which will restrict building.
The quality of life is great here, so people want to move to live here. Also, the demand of local population growth will add demand. Both of these demand factors, coupled with modest development supply, should spur increases in real estate prices long term.
But short term, there are still a lot of under-water mortgages (loans amounts are higher than the current value of the property) and too many people behind on their mortgage payments. (According to the Press Democrat today, 1 in 13!) So, expect many distressed properties to be available in the short term.
Ongoing demand and a continuous supply points to an active real estate market in the coming months.
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