Real Estate Information

CNNMoney has been running a series on American s facing financial ruin because of the ongoing problems in the economy. Honestly, some of the stories make it hard to feel sorry for people involved. Comments from readers reflect that.

Consider the story of Patricia Guerrero who had to go to the food bank on Good Friday to get food for her family. Her husband left her and she lost her job as a mortgage loan processor. Now we don t know the full story, but one fact immediately leaped out at me - she was on the brink of financial disaster after only two months. One of those months was covered by their tax refund, the other s obligations were met from savings. Guerrero has a $2500 a month mortgage payment and admitted she had to take off her Tiffany bracelet and leave her Coach purse in the car when she entered the food bank. This doesn t help her pity case one bit and commenters lambasted her.

However, it is clear by this story that she, like many other Americans, lives way beyond her means. She had no business getting a $2,500 a month mortgage on a $70,000 salary. Also, why didn t she have more money in savings? Sounds to me like she set herself up for failure. Maybe her story is the wake-up call more Americans need.

I am a single Mom with 2 kids and am scraping by making half of what she does. I don t feel sorry for her that she lives above her means and she better deal with the reality that s smacking her upside her head by moving and living realistically.

This woman should take her kids and move to another part of the US where houses are affordable. I feel nothing from this story; only bitterness at people that make bad decisions.

Longtime readers know I don t trust the media and there are a lot of omissions to this story we don t know. However, one thing you can see all over the Internet is people criticizing, condemning and complaining about failed flippers, overextended homeowners and other financial casualties.

Two themes that are very clear about this downturn is the sense of schadenfreude and the belief there should be no bailouts. As it s an election year, political candidates are being grilled over solutions to the housing problem. At HousingPanic the opinion on who has the best plan flip flops depending on the day. First it was John McCain who was right, then it was Barack Obama. The underlying theme of “correctness” is based on the assumption of personal responsibility and no bailouts. Hillary Clinton is vilified because her plan costs the most - $30 billion. In a presidential race that has been reduced to labels; black, female, war hero, I think we should vote in the smartest candidate and forget about the tags associated with each contestant.

At the root of the issue of bailouts and schadenfreude is our human sense of fairness. I ve suggested in the past the housing crisis is like a fire negligently set in an apartment building. Regardless of who set the fire, or how they did it, everyone will suffer if it doesn t get put out.

But this sense of fairness, of justice runs much deeper. I ve been thinking about it for some time and realized where I ve heard this story before. Forgive me as I m about to get Biblical.

11And He said, “A man had two sons.

12″The younger of them said to his father, Father, give me (A)the share of the estate that falls to me So he divided his (B)wealth between them.

13″And not many days later, the younger son gathered everything together and went on a journey into a distant country, and there he squandered his estate with loose living.21st Century version of loose living - Hummers, granite counter tops, interest only loans and Coach purses.

14″Now when he had spent everything, a severe famine occurred in that country, and he began to be impoverished.

15″So he went and hired himself out to one of the citizens of that country, and he sent him into his fields to feed swine.

16″And he would have gladly filled his stomach with the pods that the swine were eating, and no one was giving anything to him. Given the Jewish culture and the commandments about unclean animals, this was quite the step down.

17″But when he came to his senses, he said, How many of my father s hired men have more than enough bread, but I am dying here with hunger!

18′I will get up and go to my father, and will say to him, “Father, I have sinned against heaven, and in your sight;

19I am no longer worthy to be called your son; make me as one of your hired men.” It s better to be the servant of a rich man than continue on the brink of starvation.

Rather than hold his son to judgment, the father celebrated his return and utterly forgave him for his mistakes -

21″And the son said to him, Father, I have sinned against heaven and in your sight; I am no longer worthy to be called your son.

22″But the father said to his slaves, Quickly bring out (D)the best robe and put it on him, and (E)put a ring on his hand and sandals on his feet;

23and bring the fattened calf, kill it, and let us eat and celebrate;

24for this son of mine was (F)dead and has come to life again; he was lost and has been found. And they began to celebrate.In a turn of resentment, the older, responsible brother was robbed of his schadenfreude and complained -

25″Now his older son was in the field, and when he came and approached the house, he heard music and dancing.

26″And he summoned one of the servants and began inquiring what these things could be.

27″And he said to him, Your brother has come, and your father has killed the fattened calf because he has received him back safe and sound.

28″But he became angry and was not willing to go in; and his father came out and began pleading with him.

29″But he answered and said to his father, Look! For so many years I have been serving you and I have never neglected a command of yours; and yet you have never given me a young goat, so that I might celebrate with my friends;

30but when this son of yours came, who has devoured your (G)wealth with prostitutes, you killed the fattened calf for him. The father concluded the tale by saying -

31″And he said to him, Son, you have always been with me, and all that is mine is yours.

32′But we had to celebrate and rejoice, for this brother of yours was (H)dead and has begun to live, and was lost and has been found. ”I know this parable was not originally about homeowners, but it so eloquently explains human nature and presents the concept and need for forgiveness.

We have to do something to prevent all these foreclosures. Cities like Cleveland and Detroit have been blighted because of them. Crime has risen and governments have cut back on services because of lower revenues. California is in a similar situation. By not helping now, we will all be hurting later. Who cares if an irresponsible person started the fire? The responsible people have to put it out. If we don t, nobody will and the original irresponsibility will eventually consume us all.

This burning question comes from reader Susan -

I was wondering if you could explain the best way to buy a foreclosed property. How to I find them? Is it usually best to purchase it from a bank? Or a pre-foreclosure? Do the homes go to auction? Maybe you could do a post on this topic. Do you suggest buying foreclosed properties?

Thanks for the question Susan. Given the state of the real estate and mortgage markets in the U.S. and the increased rate of foreclosures, this is quite the timely question.

Let s recap real briefly what the stages of foreclosure are and then examine where the opportunities for investment lie in each stage. While every state has different laws and time periods associated with foreclosures, there are in general three main steps:

1. Notice of Default - When a homeowner fails to make a mortgage payment. Typically this takes place after 90 days of non-payment.

2. Notice of Sale - Whether it s a foreclosure sale or a trustee s sale does have some nuances. Essentially it s the lender telling the homeowner their house is going to be sold. This takes place between 90 to 180 days after the Notice of Default, except in Texas.

3. Real Estate Owned - The home will either be sold at auction, or the lender will take it back and try to sell it themselves.

I m going to add a fourth stage and that is the time period before the first payment is missed, when the homeowner first realizes they re in trouble.

To answer the original question about the best way to buy, I think there are opportunities to buy in each stage, but you have to understand the process well and have a competitive advantage to be successful. To try and deal with foreclosures as an attempt to buy a cheaper primary residence, probably isn t the best way to proceed because of the learning curve, but if you want to learn as an investment tool, that s a different ball game.

In my opinion, one of the best ways to pick up a house on the cheap is to get it early. Signs of distress can present themselves well before the Notice of Default unleashes a slew of offers from would be investors. The competitive advantage here is to know someone like a bankruptcy of divorce attorney who can refer you to people in those situations. One can also be referred by friends or family of the homeowners. Obviously that s the disadvantage as well. This is the most lucrative, but also the hardest way to buy a pre-foreclosure home.

A notice of default is a public record and as such can be searched by other investors who will write, call and even show up on the homeowner s doorstep trying to “help” them. Deals can be made at this stage, particularly if the homeowner has equity. Another tactic is to get a short sale from the bank with the seller being able to walk away and the lender providing the profit of the deal. This is also a potentially lucrative step to invest in, but has tons of competition from other investors. The way to get the NOD lists is to go to the courthouse or contact a title company that can provide daily lists. In Utah, one can subscribe to NewReach and also get updated lists. The disadvantage to buying homes in this stage is the competition from other investors and the potential the lender could delay or nix a short sale.

Once a home is ready to be sold at auction it s had dozens, if not hundreds of investors, agents and potential buyers look at it and pass on it. The homeowners could have damaged it, or had other parties put liens on it that could otherwise cloud the title. In addition, if the homeowners haven t yet moved out and you win the auction, evicting them becomes your responsibility. You may have not had the chance or ability to inspect the inside of the property and you ll need to close within 48 hours. Finally, you ll be bidding against a group of professional investors that know the system inside out. Still want to buy a home at auction? A new foreclosure auction company, Vestus, estimates 25% of all homes scheduled for auction actually get sold there. Further, they calculate only 50% of those homes have profit potential. Essentially only 12% of homes sold at auction have profit potential. This is the riskiest time to buy a home in the foreclosure process.

If a home doesn t sell at auction, for whatever reasons, the lender will add it to their portfolio of real estate owned or REO homes. They may make minimal repairs if needed and market the home for sale. Since lenders are in the business of lending, they tend to do poorly at selling. Additionally if a real estate agent is hired, their commissions are lowered and these homes spend a lot of time on the market. I used to bid on a lot of HUD homes back in the day. When the Utah market started booming, HUD homes virtually disappeared. The HUD process is a bit different than a regular REO because they do an auction. I never won a bid on a HUD home.

Sometimes a lender that quashed a short sale offer and a low bid at auction will end up selling for the same price, after incurring additional expenses, once the property becomes REO. This is where I think a lot of investment opportunities will lie in the next few years. A buyer has the opportunity to inspect an REO just like they would a regular home for sale. However, an REO could have major problems like a home I looked at that suffered water damage to the wood floors throughout the house, or the one that didn t get past the wiring phase of construction or the failed flip that was still in mid-remodel.

As you can see, there is no one way to buy foreclosed properties. You ll need to figure out your financing far in advance. Some distressed properties can t be purchased using traditional financing because of the home s condition.

The bottom line is every stage of the foreclosure process presents opportunities for investors that are prepared and have a competitive advantage of that stage. One investor I know only does pre-foreclosures. Others do quite well at auction. I personally look for REOs or other pre-foreclosure distressed properties. One can often find these properties on the MLS through driving neighborhoods or simply contacting lenders for REO lists. Make sure you are comfortable with whichever stage of the process you re looking at and figure out what your competitive advantage will be.

The real estate downturn has hit employees of the industry very hard. During the boom years everybody wanted to be a real estate agent and the numbers in those ranks soared. Now that the easy money is gone, so are the new agents. It s probably good for everyone involved.

Mortgage brokers are facing a similar dilemma. Not only has demand decreased, but so have offerings. I used to receive half a dozen rate sheets in my email each day. Now I receive one. Many wholesale lenders have gone out of business, while others have eliminated their wholesale broker divisions entirely.

Regardless, the housing crisis has triggered a huge shift in the industry s dynamics. Big banks, such as Bank of America Corp. and National City Corp., have stopped making loans through brokers entirely,

relying instead on their loan officers. National City said it was forced to do so by a continuing downturn in loan demand, while Bank of America said it saw better “long-term opportunity” in working through its own loan officers.

I ve seen reports saying broker originated business is defaulting at a rate of 20%. Lenders typically factor a default rate of 5% into their rates. On top of that, a housing downturn and a credit crunch are reducing the pool of borrowers available even nine months ago.

Mortgage brokers are having to adapt to this new environment. Some that have been in the business pre-boom are consolidating and hunkering down. Others are shutting their doors and finding work in a different profession. Others still are going to work directly for lenders in their retail divisions.

Count me in that third group. Effective April 1, I m going to work for a national FHA/VA lender with its own marketing department. I will no longer need to blog for business. With Utah s licensing requirements, I can t originate loans my new employer is unable to originate on the side.

You may have noticed some changes around here. The contact information is gone. I won t be soliciting business. But I will still blog. I love real estate and I love writing. Over time this site has blossomed on the search engines and is now providing a decent ancillary income through advertising. Without the constraints of seeking business and representing a company, I can speak freer about what s going on. Having my head fully immersed in real estate on a daily basis, I ll be able to provide a better perspective.

Over the past two weeks I ve been thinking a lot about how to proceed. I could quit blogging all together, or I could try and sell this site to another local company. I also considered restarting the nationally focused real estate blog I started last fall. The fact is this site ranks so well on the search engines, I d be starting all over from scratch with another blog. I don t want to do that. It s better for me to expand the focus than to restart. The Salt Lake Real Estate Blog has just gotten bigger!

One of the things I ve noticed is people who contact me tend to be from out of state. They find this site on the search engines when they look to move to Utah. As such, I ve left a contact form and I m happy to refer a lender and a real estate agent should you need such services. The same applies to locals as well.

Additionally, I plan to expand the advertising opportunities on this site. This is a geo-targeted site with lots of strong search engine positioning. Please contact me for a menu of inexpensive advertising options.

Besides death and taxes, the thing we can be absolutely sure of in this life is things will change. How you deal with change can really impact your quality of life. Since joining the mortgage industry in 2003, I ve only worked for one company. I d like to thank Byron Goates at Integrity First Financial for five great years. Byron gave me my start and has provided countless advice and help on many real estate issues. He even guest posts here from time to time and probably still will.

Get ready for the new and improved Salt Lake real estate blog, coming very soon.

Home sales were reported as being up for the month of February by the National Association of Realtors. This was a surprise to many economists who expected yet another decline in purchasing volume. Sales in Utah reflected the national numbers as well.

Alas, this report was yet another don t believe the headlines, believe the numbers type of story. To get the true picture, I had to go to multiple sources.

Let s start with the national picture. CNNMoney reported Home sales rise slightly on biggest-ever price drop.

The National Association of Realtors reported that sales by homeowners rose 2.9% in February to a seasonally adjusted annual pace of 5.03 million, up from January s reading of 4.89 million. It was the first month-over-month rise of the annualized pace since July.

The volume of sales were up in February over January. That s actually good news in itself, but I disregard month over month comparisons. It s year over year that matters.

Though February s pace beat economists expectations, sales last month were still down 23.8% from a year earlier.

In reality, sales volume was down and so were prices -

The median price of a home sold during the month fell 8.2% to $195,900 from $213,500 a year earlier - the largest year-over-year price drop on record.

Salt Lake s existing home sales were a bit tougher to figure out. KSL.com reported yesterday -

Home sales jumped 19 percent in February from January according to Salt Lake Board of Realtors Vice President Ryan Kirkham. That represents a huge change from the same time a year ago.

The brief article concluded - Prices were down 4 percent last month.

This morning the Tribune clarified the median price -

Locally, the median sales price for homes and condos sold last month was $225,000, down 4 percent from $234,950 in January and off 1 percent from a year ago.

In Salt Lake, sales are up, but median prices are declining. Considering all the fear in the financing side of real estate, I consider these numbers encouraging, but one month doesn t constitute a trend.

A few weeks ago I was having lunch with some mortgage brokers and the subject of prices in the valley came up. One asked the very relevant question, “Are prices in Utah going up or going down?” He explained he had a friend with two high-end spec homes in Draper that he kept getting low ball offers on. His friend wanted to know if he should take the offer or wait until the market turned. I suggested the Salt Lake real estate market is a tale of two price ranges. Homes above $400,000 are having a very tough time selling and that is where the biggest price drops are coming from. Some new neighborhoods in Draper, West Jordan, Riverton and Herriman are suffering from foreclosures due to mortgage fraud and speculation which is driving down demand and prices.

On the other hand, demand for homes less than $200,000 in decent neighborhoods is still very strong. The answer to the question depends on your price range. We ll have to see how the quarter finishes up, but I think there will be very little appreciation reflected in the overall numbers. However, homes in certain price ranges and certain neighborhoods won t be affected. I think the volume of sales reflects demand still exists for housing in Salt Lake.

One thing s for sure, FHA won t become the new subprime. While the information you re about to receive isn t FHA policy, it will impact FHA loans in Utah and throughout the nation.

I obtained an update from an FHA lender yesterday citing new credit requirements for underwriting and new costs.

Middle FICO scores:

601-619 = .5% hit to price. Less than 600 = 3% hit to price. No credit score = 1% hit to price.

Additionally, manual underwriting requires a score of 580. However, automated approvals can be any score. Technically, there is no minimum.

It s important to remember this is the policy of one lender, so if you re on the cusp and you need a loan, be sure to check with other lenders. Unfortunately, most lenders are headed in this direction.

With home prices stagnant or declining, it s now more important to get your personal financial house in order before buying a home. If you can t pay your regular bills on time and don t have savings, you have no business buying a house right now.

Contagion is probably the best word to describe the far reaching effects of the housing downturn. Private mortgage insurance seems to be the latest portion of the mortgage business tightening standards and the fallout will remove conventional 100% financing programs from the marketplace.

I was first made aware of the problem when working with a client. The loan rep claimed Freddie s expanded approval program, which offers 100% LTV, no longer has mortgage insurance available, which essentially removes that option from borrowers. This is not a Freddie Mac policy, but a condition of the marketplace. As a result, a program exists nobody can qualify for. This will soon be eliminated.

The same representative explained other approval levels should see the same thing happen. What

this means is 100% conventional loans will probably disappear quite soon. Meanwhile, my borrower hangs in the balance hoping to close before these changes take place.

Yahoo! News reported similar findings last week -

In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won t insure certain types of home loans — those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.

Mortgage insurance protects the lender to 80% of the loan amount if the borrower defaults. Premiums vary depending on the risk factors. My loan rep said some policies can be as high as .97 - about $200 per month on a $200k loan. This cost is factored into debt to income ratios and can lower the amount of house a borrower can qualify for.

More news from the field states -

I have had two lenders tell me today that 100% loans are all but gone. They are advising anyone who is looking to finance 100% of a home purchase in the near future to check with a lender to see how this impacts your individual situation.

It seems the issue is with Private Mortgage Insurance (PMI) providers. As of early this week, the only remaining 100% PMI provider is Genworth. All of the other PMI providers are only issuing insurance for 97% of the purchase price. The word on the street is that Genworth will go to 97% maximum soon.If you re looking to buy a home, be sure you are prepared to come up with at least 3% to 5% down. During the boom, it made sense to pay MI or take out a piggy-back second to get into a home as prices were appreciating faster than most people could save. In a slowing or declining market, that logic has changed. It makes more sense to have a down payment and soon it will become an absolute requirement.

The Federal Reserve Board chopped rates a whopping .75% yesterday. In a widely expected move, short term interest rates now sit at 2.25%. The discount rate, a previously rarely used credit facility allowing direct borrowing from the Fed, was cut to 2.5%. Wall Street responded positively with the Dow sharply up 420 points.

Yet this cheaper money will probably not benefit housing. Why? On the same day the Fed was cutting, a major investor was tightening FHA standards. I found out Chase has eliminated FHA loans below 580 and tacked on a hefty 3% hit to price for those with credit scores of 580-599. A 2.5% hit to price is being tacked on to the newly created Jumbo FHA loans.

While these price ads and credit tightening are not across the board FHA policies, the fact a big mortgage

investor is making these changes suggests other investors will soon follow. I thought the increased loan limits wouldn t affect the price of FHA loans like it did with conforming, but I was wrong. Some of these additional costs will be mitigated through seller concessions, but many marginal buyers will simply put off the purchase because of the costs.

This action also sends a message that maintaining good credit is crucial to getting into a loan. Those people considering walking away from a home better understand the full costs in accepting a lower credit score.

I m not sure what the right word is irony stupidity, but Congress action to help the housing market may actually hurt it.

What am I talking about? The higher temporary loan limits passed in the stimulus package. We ve wondered for some time what the true cost to these higher limits would be and this week we got more answers.

I reported last week that conforming jumbo rates would increase .25% for fixed rate loans, while ARMs would see a .75% hit to rate. This week, we ve learned FHA s increased loan limits would see a 2.5% hit to price. That s a pretty big hit to absorb at one time.

I ll go into some further detail of the implications of this higher pricing in a future post, but my gut reaction is higher loan limits won t help as much as Congress originally hoped or intended.

Thinking about this over the past week has led me to come to the following conclusions:

1. Borrowers on the cutting edge for a refinance, that don t have much equity, won t see help from higher limits.

2. Borrowers in high cost areas, with equity, will benefit.

3. Buyers in high cost areas will probably benefit, if they can get their hits rolled into their loans from seller concessions.

4. There is no benefit to buying a more expensive house because of the increased loan limits.

Many people in the real estate industry, myself included, felt loan limits were hampering sales. Now that loan limits have increased and the risk premium is priced in, it seems to me that increasing them will not have that much benefit overall.

The previous spread between conforming and jumbo was between .5% to 1% to rate. With the new hits for loan amount, credit score, loan to value and adverse market, the new jumbo conforming loan is much more expensive than the old jumbo.

However, wider FHA loan limits will probably help many troubled homeowners because of wider credit acceptance and the fact the hit of 2.5% is to price (i.e. a flat fee).

When these limits expire at the end of the year, I suspect limits will return to their previous levels. In the mean time, there will be a rush on FHA refinances in the most troubled real estate markets.

It s been a busy week in the real estate world. New bailout proposals surfaced. New loan limit limitations became clearer. Mortgage rates were on a roller coaster. I haven t commented on any of it. I ve been busy too, but I ll have a bunch of new stuff this weekend.

Today, I m going to take a page from the MSM and talk about the most important thing to happen in real estate this week. Michael Jackson saved Neverland Ranch from foreclosure. Though from the looks of it, there s not too much to be saved.

Jackson hasn t lived there since 2005, so some may question the financial prudence of saving a $24.5 million estate, one hasn t set foot in for three years. I suppose Jackson s action shows there is still some shame in being foreclosed on, despite other homeowners ruthlessly walking away.

One TV personality who didn t save his home from foreclosure is local attorney Keith Barton. For those of you not in the Salt Lake market, Barton is one of those stereotypical, ambulance chasing attorneys with commercials constantly running. His motto is, “One call, that s all.”

Apparently, Barton used his $14.9 million, 9 acre home with seven bedrooms in Alpine as collateral for a loan he couldn t make good on. The lender foreclosed on the home and its furnishings. The mansion sold at auction for $7 million on January 20th.

Ice cream parlor

Do you remember Richard Culbertson? He was the Mayoral candidate in Eagle Mountain who had his real estate license stripped for mortgage fraud weeks before the election. Now he s facing criminal charges.

Along with his wife Kathleen, Culbertson is being charged by the State s Attorney General office for falsifying information on loan documents and recruiting straw buyers to purchase homes. The indictment claims the Culbertson s benefited some $60,000 through illegal cash back at closing.

Like the Riverbottoms scheme, the tactics used are the same, but the dollar amounts and number of transactions are far fewer. The Culbertson s are being prosecuted under a new Utah mortgage fraud law, though they could still face Federal charges as well.