What’s the Deal?

Cash buyers have come out of the woodwork in Tucson and are snapping up properties left and right. Take a look at the trends over the last five years:

And just an FYI, to keep things simple I only included Single Family Residences (SFRs) in these statistics but I”m sure if I included everything else (condos/townhomes/rental properties/land) the trend would be similar; cash buyers are just making moves left and right.

Where Is This Happening?

This trend is not just in Tucson but is occurring all over the US:

Las Vegas:

Buyers who appear to have used cash to purchase their homes accounted for 46.7 percent of all May sales, down from 48.0 percent in April but up from 42.0 percent a year earlier, based on an analysis of public property records. The median price paid in these seemingly all-cash deals in May was $105,000, down from $112,000 in April but up from $89,250 a year ago.

…

All-cash deals have become popular in many Western markets where prices have dropped sharply, luring investor buyers who can’t always qualify for traditional mortgages. Moreover, sellers favor the relative speed and certainty of all-cash transactions.

Los Angeles:

Buyers who appeared to have paid all cash – meaning there was no indication that a corresponding purchase loan was recorded – accounted for 27.1 percent of March sales. In February it was a revised 30.0 percent – an all-time high. The 22-year monthly average for Southland homes purchased with cash is 13.8 percent.

Miami:

With financing still difficult to obtain, all-cash buyers and deep discounts on distressed properties are propping up sales, said Peter Zalewski, a principal at Bal-Harbour-based Condo Vultures.

About 60 percent of South Florida sales have gone to foreign buyers, who are more likely to pay with cash and were never eligible for the tax credit.

So What Does This Mean?

Cash buyers coming out of the woodwork can only be a good sign. It shows people are finally seeing opportunity for investment/growth/return and are willing (and able) to put their cash back into the market.

Any market recovery will start with investors trying to make their money and while the rest of the economy may be sluggish the real estate market will be the first to turn around.

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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.

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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.

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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:

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!

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Related posts:

1. Tucson Short Sales – Part 1 – What are Short Sales? Since the real estate boom of 2003-2005 the Tucson real...
2. Tucson MLS needs new designations Since the influx of short-sale and bank-owned homes I have...
3. Tucson Short Sales – Part 2 – I Am Ready to Short Sale My Home.. What Are The Repercussions? This is part two of my Tucson Short Sales series....

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.”

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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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A headline from the Arizona Daily Star’s “Breaking News” section – “First Magnus Financial Corp. has filed for Chapter 11 bankruptcy, the company announced today.” The seemingly overnight meltdown of First Magnus last week was just the latest consequence of the [tag]loose lending practices[/tag] by banks the past few years. Now, there are whispers of [tag]Countrywide Home Loans[/tag] having financial issues and Capital One just closed their wholesale mortgage unit yesterday.

How did this happen, you ask? Here is the short and sweet of it: When banks began loosening their lending standards several years ago, allowing “no-doc” loans and option ARMs and Interest Only mortgages, everyone was happy. After evaluating a potential buyer’s ability to repay the loan, and if the lender’s criteria were met, the buyer was given a loan. The primary lender may then hold onto the loan itself in it’s portfolio, but more commonly they sold the loan on the “secondary market.” They then used the profits from the sale to continue lending money to other potential buyers.
The secondary market is simply a marketplace where investors can buy the loans. For example, [tag]Freddie Mac[/tag] is a large investor in the secondary market. They buy up mortgages from primary mortgage lenders do a few things with them:

1. package those loans into securities, and
2. sell the securities to investors on Wall Street.

For the past few years this cycle has been a very fruitful one; with interest rates at historic lows and practically everyone qualifying for a loan, the housing market experienced an absolute explosion in growth. Investors were happily investing their money in the secondary market and primary mortgage lenders continued lending money. But then… home growth slowed. More houses came onto the market, whether by investors trying to quickly unload a home or actual homeowners deciding it was time to sell. New home builders were suddenly left with excess inventory. And what happens when inventory goes up? Prices go down!

Investors no longer had the rabid interest in the secondary market that they did when the housing industry was booming. Primary mortgage lenders suddenly found themselves holding millions, or billions of dollars worth of loans that they could no longer sell. Essentially, this is what happened to [tag]First Magnus[/tag]. Whether through risky lending practices or decreased activity in the secondary market (maybe both), First Magnus is the latest casualty in the mortgage industry. Keep in mind, there are other factors involved in the lending industry causing these effects (take a look at Asset-Backed Commerical Paper (ABCP)).

Will I Be Affected?

I truly feel sorry for all of those employees left in the dust by First Magnus. Thankfully the blow has been softened somewhat by community assistance in the form of a job fair co-sponsored by [tag]Stewart Title[/tag], the National Association of Professional Mortgage Women Tucson Association, the Arizona Association of Mortgage Brokers and the Southern Arizona Mortgage Lenders Association. More information on that job fair here.

I’m curious, is anyone else seeing the same types of events with local lenders?

[tags]First Magnus Bankruptcy, Tucson Mortgage, Tucson Real Estate[/tags]

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Well some good news in the financial sector; Fair Isaac Corporation, best known to most of us as the source of FICO credit scores, Tuesday announced it will be adjusting it’s credit scoring standards to take into account the common practice of credit ‘boosting‘. It will no longer take into account an authorized user status when determining your credit score.

A brief excerpt from a quality blog I frequent:

An authorized user is a person permitted by a credit account holder to use an account, typically a family member who is managing credit for the first time. Used legitimately, authorized user account information has helped both lenders and consumers by enabling lenders to use FICO scores when making credit decisions for consumers who are starting to establish a credit history. Fair Isaac’s research indicates that the next version of its FICO scoring formula will deliver increased predictive power without considering authorized user accounts.

I am very pleased an industry heavyweight has hopped on board with the effort to curb some of the issues that are finally coming to light in the housing market. The bottom line of this credit boosting change (named “FICO 08″, available this September) is that it will prevent people from qualifying for loans who never should have qualified for them in the first place! There is no doubt this change comes a little late, but is that really a surprise?

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