Finance Sector News

129th Carnival of Real Estate Posted Yesterday

I highly recommend stopping by Sacramento Real Estate Voice and reading the winning blog entries of the 129th Carnival of Real Estate (dubbed the Sacramento Carnival de Mardi Gras),  there are some extremely informative articles written by some talented writers.

My personal favorite was Your IRA and 401K Can Buy a House! Five Ways to Become a Landlord on Someone Else’s Money written by Gretchen Faber, in this market there are some smoking deals around and making investment moves now may pay off very handsomely in the future.

Tucson Market Beginning to Turn Around?

A few weeks ago a writer/reporter contacted me with some questions regarding the Tucson real estate market and I had no problem shooting back a lengthy email describing what I currently see happening. I like discussing the trends and developments I see in real estate as it forces me to keep abreast of market conditions and makes me that much more informed for my clients.

The article was just published yesterday by NuWire Investor, an investment website that has a plethora of articles and resources for investing opportunities. Note: I was not reimbursed in any way for my contribution.

Here is the article: Speculators Scatter, but Investors Welcome in Optimistic Tucson

I’m cited along with Dave Smith, another local Realtor who also runs an excellent Tucson real estate blog. Check out his site here.

In my opinion the re-emergence of investors in the Tucson market is a sign that Tucson market has either bottomed out or is close to it. With lending guidelines as tight as they are now and interest rates not ridiculously attractive (although in the past few weeks they have dropped significantly) an investor must have good reason to pounce on property, usually dictated by price. Let’s hope this trend continues and Tucson can bust out of the recent real estate funk we’ve been experiencing.

Tucson Short Sales & Lender Owned Homes Continue to Rise

This morning I went back through our MLS data and charted how many sales there have been for short sale and lender owned homes for the past few years. I was curious to see what the trends looked like and if they matched up what I’ve been seeing lately, and for the most part my assumptions were true. Below are the numbers:

	Short Sales			Bank Owned
1999	1		1999	67
2000	3		2000	82
2001	7		2001	98
2002	6		2002	115
2003	8		2003	75
2004	4		2004	74
2005	0		2005	29
2006	2		2006	112
2007	31		2007	149
2008	132		2008	297

 

Keep in mind these results are from the Tucson MLS and because I searched on the keywords “short sale” and “lender” we may have a few extraneous results. I’ve been in touch with the MLS staff concerning the lack of Tucson MLS designations for short sale and bank-owned homes and apparently they are working on a solution.

What we see are several trends dating back to 1999. There was a mild rise in short sales/bank-owned homes in 2002 which fell off during the housing boom, and then in 2005 there weren’t any short sale records in Tucson.. not surprising considering the inflated market.

In 2006, however, we see almost a 300% increase in bank-owned homes with only two short sales. This can be attributed to a couple things:

1. Housing market was starting to trend downward
2. A lot of people who refinanced and/or took out HELOCs in 2005 with the thought of selling in the near future were suddenly faced with a mortgage higher than their home’s value
3. Short sales were still fairly uncommon to real estate agents and homeowners

In 2007 as real estate agents became more educated on short sales and received the proper training closed short sales went up. So far this year, in only seven months, we are already at 132 closed short sales which is a dramatic increase from just last year.  Lender owned homes have also mushroomed to 297 closed deals this year and will likely surpass 450 sales before the year is over.

So what will the next year or so look like for short sales and bank-owned homes? Personally I think we will probably spike at the end of this year, perhaps next spring, and hold fairly steady for a bit while banks unload their excess inventory and agents continue to be successful in short sales.

If the “Housing and Economic Recovery Act of 2008” being proposed by Senators Chris Dodd (D-CT) and Richard Shelby (R-AL) actually is passed I think this number may go up in the short term; in my opinion the bill, while well intentioned, is fraught with potholes and danger signs that can’t be ignored and it practically enourages homeowners to go into default on their mortgage. Read the .pdf linked above and see if you come to the same conclusion!

First Magnus Financial Corp. Returns to Business.. as StoneWater Mortgage Corp.

Yesterday the Arizona Daily Star published this article about the executives of the now defunct First Magnus Financial Corp. forming and opening another mortgage company, StoneWater Mortgage Corp.

It seems unfair to me that a company can go belly up (which I wrote about last August), declare bankruptcy (all the while not having paid their employees their final wages), and yet come back to life in a matter of months doing the same thing while the mess they left behind still lingers! I know several people personally who were hit especially hard by the repercussions from this disaster, and I’m talking not only about being laid off, but losing cars, homes, and having family life affected.

A brief excerpt quoted Karl F.W. Young, former CEO of First Magnus:

“While it stayed largely away from loans labeled as subprime, First Magnus did do substantial business in “Alt-A” loans, which were offered to borrowers with high credit scores but have been deemed risky by investors.

Young said StoneWater will stick largely to “agency” loans — those that fit the guidelines of government agencies like the Federal Housing Administration and the quasi-governmental mortgage buyers Freddie Mac and Fannie Mae.

Initially, StoneWater will also do business only as a wholesale lender — one that provides funding for mortgages to brokers — not a retail lender that interacts with borrowers, Young said. No lending will be conducted in Tucson, he said.”

A Word on the Subprime Market From a Local Tucson Loan Consultant

We all know about the collapse of the sub-prime market and the tidal wave effect it has had on the mortgage industry as a whole. Here is a brief synopsis. Over the last few years, Wall Street investors had fallen in love with the returns on sub-prime (lower credit ratings) mortgages. They paid a premium for these loans in large quantities. The demand of this sort of product in turn induced the lenders to lower their underwriting standards and make more of these loans.

After these portfolios started to mature, the true rates of delinquencies and losses was recognized to be higher than predicted. Aside from having homeowners who were never financially qualified, buyers were put into risky loans such as option ARMs that they did not entirely understand. At this time, the investors started buying these loans at a discounted rate instead of a premium because of the increased risk associated with these securities. The lenders would package thousands of these loans for some period of time and all of a sudden they had to pay to get rid of the loans in order to replenish their credit lines.

It gets worse – Most lenders use what are called “Warehouse” lines of credit to make their loans. As Wall Street recognized the error or their ways, the banks and investment houses that had established these credit lines with the mortgage lenders started making “margin calls“. This is a demand to pay down the line of credit in a given time frame. A mortgage lender could have a $20 million line of credit with a bank. The bank could believe that the collateral is only worth $18.5 million and require a payment of $1.5 million in the next 14 working days. And then every other creditor will want their line paid down as well so as not to be the most exposed party to one portfolio. You can see where the combination of cash expenditures spelled doom for mortgage lenders. But, these lenders did this to themselves. Unfortunately, there are also a huge bunch of folks out there that can’t sell their homes because prices have dropped and they can’t refinance because the lenders are requiring better credit and more equity.

Where are we now?

Rates are still good for people with good credit. “Piggyback” loans (2nd mortgages) are going away. This means that people with little or no money down will most likely have to pay Private Mortgage Insurance (PMI) in order to get a loan. This protects the lender if the house is foreclosed upon and the amount from the sale of the home is less than the balance on the note.

What may be coming?

This is difficult to predict. I anticipate that home prices will continue to go down for the next 12-18 months. There will be a high delinquency and foreclosure rate. Mortgage lenders will have to rethink their business models in order to protect their cash positions and stay solvent and lastly I would anticipate more government regulation in the industry in regards to educating the customer and protecting them from risky loan products and unscrupulous lenders.

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Patrick Randles is a guest contributor to Tucson REblog and gives an insider’s view on the mortgage industry. He is a Mortgage Loan Consultant with El Conquistador Mortgage in Tucson, Arizona. Patrick can be contacted by phone (520-850-7485) or email. Feel free to post any questions for Patrick!

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