Cram Down Loan Modification

Senate Democrats are attempting to push through a controversial plan to allow bankruptcy judges to modify the terms of troubled borrowers’ mortgages as part of a larger package of foreclosure prevention programs. Allowing judges to “cram down” loan modifications over the objections of lenders could raise interest rates on mortgage loans by 1.5 percent or more, industry groups fighting the proposed changes to the bankruptcy code say. If the bill caused interest rates to go up by 1.5 percent, payments on a $300,000 30-year fixed-rate loan would increase by $300 a month. The bill would also mean higher down payments for home purchases and increased equity requirements for refinancing existing home loans.

The above is certainly likely to make the real estate investing climate slightly worse off than conditions are now (low mortgage rates, depressed housing prices). On the flip side, there are some positive points that the new bill (S2636) is going to bring to the table, which hopefully can curb the foreclosure frenzy.

Some of these positive points include: $200 million for pre-foreclosure counseling, and giving the authority to the state housing finance authorities to issue $10 billion in additional mortgage revenue bonds to refinance subprime loans and provide mortgages for first-time home buyers.

Opponents of the plan say allowing bankruptcy judges to change the terms of mortgages after the fact will raise the cost of borrowing, in part because investors who purchase securities backed by mortgages will have less confidence in their ability to collect payments or foreclose on properties.

The Most Fascinating “Guru” Website Ever!

I have to admit that after I stumbled upon this website by John T. Reed, profiling various real estate “gurus” – the good, the bad and the ugly – I could not tear myself away from my computer screen for several hours.

Real estate investing has been historically infested with the “gurus” and infomercials that prey on the less-than-sophisticated novice investor. Even though I myself am not an advanced investor by an stretch of imagination, it is quite clear from the get-go what some of these gurus are all about. I find this list a must-read, especially for beginners.

In the world of real estate investing, it is important to separate the truth from fiction, the good advice from the bad, and opportunistic schemes from ways to build real long-term wealth. We at MeetMOJO are committed to becoming a resource for real estate investors, so we will be working on providing the most usable and transparent information to our users and readers. Please share your experiences with our community, so that we can all become stronger and better educated.

Here’s to your success, wealth and health!

Rent vs. Buy

As so many homeowners are losing their homes to foreclosure, and the real estate market is at the forefront of our economy and politics, investors like us are trying to understand how our worlds are affected.

Because real estate prices have plummeted, quick flips and investing for capital gains are no longer no-brainers of yesteryear. This is due to a confluence of several factors, such as: 1) an oversupply of inventory driving down prices (with new foreclosures predicted to keep flooding the market), 2) tighter lending standards reducing the pool of buyers and 3) general market malaise and impending recession making just about everyone apprehensive about real estate .

Again, the savvy real estate investors know that during difficult times is when wealth is created. Real estate will always be a great investment mechanism, but it’s the exit strategies that will have to change. Hence, investors with experience are focusing their attention on longer term rental investments. Because of plummeting prices, many investors will see positive cash flow from their properties.

As such, it is more important than ever before for real estate investors to understand the relationship between homeownership and rents. I stumbled upon this blogpost from the Curious Cat blog, which I found very interesting and wanted to share. It summarizes the following research paper which focuses on the relationship between rents and home prices between 1960 and 2006. The article focuses on the rent-price ratio as part of real estate returns calculation (the higher the ratio, the more expensive the rents are vs. home ownership). The rent-to-own ratio is basically the “dividend yield”, which must be considered in addition to the capital gains, when calculating the return on the real estate asset. This article is an interesting “rough guide” to the rent-to-own relationship. As the capital appreciation on real estate had increased more rapidly than rents between 1995 and 2006 (the housing bubble), this second part of the “ROI equation” had decreased, which is important to consider. With rents on the rise and housing prices falling, the ratio is likely to get realigned with its historical average.

Foreigners Invest in NYC Real Estate

Came across this post in Curbed today. This is further proof of increased foreign real estate activity in the U.S. Due to the weak dollar, foreigners are now flocking to the U.S. real estate, which is now a bargain for them. I hear from realtors who sell to foreign investors, that lately upwards of 30% of Manhattan condos have been sold to foreign nationals.

Also, check out this Business Week post which states that, according to the 16th annual survey of AFIRE (Association of Foreign Investors in Real Estate), the U.S. considered the “most stable and secure” country for real estate investment, as well and the country with the best opportunity for appreciation. NYC and DC are top two cities within the U.S. for foreign real estate investment.

Can foreign investment help stimulate our recently dormant demand for real estate, when our own citizens are feeling rather anxious about the state of real estate? I think it’s still a drop in a bucket overall, although foreign presence is really felt in NYC. In places like NYC and DC it can do a bit to ensure that new construction stays afloat. But it won’t do a whole lot for middle America, the America that got hit the hardest by foreclosures and subprime meltdown.

More on “Project Lifeline”

Well, project Lifeline was formally announced today by Treasury Department and the Department of Housing and Urban Development. As mentioned before, it halts for 30 days foreclosure proceedings for homeowners in default for over 90 days. The idea is to give homeowners and lenders some additional time to work out better loan terms.

It looks like so far it’s a pilot involving 6 of the largest players in the mortgage industry: Bank of America, Citigroup, Countrywide, JP Morgan, Washington Mutual and Wells Fargo. The hope here is that the rest of the lenders will follow suit. These 6 lenders have already been involved in the Hope Now alliance, an effort organized by the Bush administration, to keep subprime ARMs from resetting. The Hope Now alliance states that it helped 7.7% of 7.1 million subprime borrowers (or 545,000 borrowers) during the back half of 2007. This was done through permanent loan modifications (such as lower interest rates) and negotiation of repayment plans.

Unlike Hope Now, Project Lifeline addresses all mortgages, not only subprime. Project Lifeline does not apply to vacant properties, investment properties, or homeowners in bankruptcy proceedings or facing a foreclosure date within 30 days.

So the whole thing makes me wonder: If this actually a viable solution or is this a “photo op” for our politicians? After all, perception is everything, especially in this election season. And we are, after all, headed towards a recession… So it’s important to at least look like we are doing something.

Project Lifeline just may be a logistical nightmare for the lenders. How will they handle all these homeowners calling them over the next 30 days? And how will anything actually get resolved in 30 days? Borrowers and investors negotiating on their behalf have already been having a difficult time getting lenders to respond; short sales take “forever and a day” to negotiate. There are just too many foreclosures. And there will only be more.

And will homeowners actually take action? The real issue here is that there is limited incentive for those in foreclosure to do anything about it. Now that home values have plunged, many homeowners are “upside down” on their mortgages, owing more than their homes are worth, and having withdrawn all equity during the “boom times”. It’s becoming easier and more rewarding for the homeowner to just walk away. The proverbial ATM is empty.

As we all know, “what goes up, must come down”. By some accounts, home values are down for the first time since the Great Depression. Home values had skyrocketed over the past number of years, growing at a rate far exceeding average salary growth. So to afford the American Dream, citizens of America had to get into mortgages that overextended them, often getting into ARMs with low initial rates that were scheduled to reset, only delaying the inevitable. All for a chance at the American Dream! Can we blame them? And can we blame the lenders for trying to help (not saying that all lenders are selfless).

Even more disturbing is the natural propensity of our culture to use home equity as an ATM, forsaking all reason. It is not all lenders’ fault, even though it has become popular to point fingers at these “unscrupulous” bankers. These are just some of the reasons why we are in this mess. Call me cynical, but I really doubt that a 30-day time-out will do a whole lot.

Henry Paulson to Announce a Foreclosure Rescue Plan

Within the hour, Secretary of the Treasury Henry Paulson is due to announce the Foreclosure Rescue Plan. This plan is aimed at temporary relief to homeowners in foreclosure.  It mandates a 30 day “time-out” for those who are 90+ days behind in their payments. These 30 days will give the homeowners in default time to negotiate a win-win solution (or any kind of solution) with their bank. For now, Bank of America Corp., Citigroup Inc. and four other U.S. lenders will announce their alignment with this new plan.  It is not yet clear if other lenders will follow suit.  My guess is that they most certainly will.

More on this tonight!

Comments?  Please post ‘em!

The New Stimulus Plan: Cure or Rhetoric?

Last week, Congress changed the conforming loan limit to as high as $729,750, as part of its Stimulus plan. This was part of the economic stimulus package signed by Congress and passed on to President Bush for signature on 2.7.08. This change raises the limit from $417,000 on maximum size of mortgages that Fannie Mae and Freddie Mac can purchase and market as securities. Same increases apply to loans backed by the Federal Housing Administration, a government agency that insures loans to borrowers with poor credit. So some loans that were considered jumbo are now considered conforming, which means lower mortgage rates.

The spread between conforming and jumbo loans had reached as much as 1% in recent weeks, because jumbo loans are considered riskier. Due to increase in mortgage defaults and nationwide credit crunch, banks have become more hesitant to create loans that couldn’t be later sold to Fannie and Freddie. Thus, higher interest rates were extended for these loans.

This new law affects investors and homeowners in 2 ways:

1) Firstly, it is designed to sell homes easier in higher priced areas, by making the mortgages more attractive to buyers.

2) Secondly, the lower rate will save homeowners money on their mortgage payments. Owners of existing mortgages can now refinance to a lower rate. What does this mean for investors? An opportunity to make some monthly cash flow! If you have a property that was bought at a jumbo rate, this is the time to refinance and perhaps see some cash appear in your pocket.

According, to AP, “Fannie Mae CEO Daniel Mudd said last week that over the past few years home prices rose so high in parts of the Northeast and West Coast, hiking the loan limits became necessary.”

The new increased limits, however, are temporary and are set to expire at the end of the year. It also excludes Fannie and Freddie from buying loans over the $417,000 limit made before July 1, 2007. However, old loans that are refinanced are considered new loans and thus can be sold to Fannie and Freddie.

It remains to be seen what impact this new law will have on home sales, as it applies to only 20 of the 160 metro areas in the U.S. Expensive real estate areas like New York and California stand to benefit the most from this plan. I suspect that reducing conforming limits simply brings mortgage rates closer to reality, to coincide with property values that had grown for years before coming to a screeching halt in 2007. I don’t believe that it will be easier to sell a house in excess of $417,000 than to sell a house under that amount: there is no shortage of either type of property out on the market. This is most definitely NOT a seller’s market. However, I do believe that allowing owners and investors to refinance will provide somewhat of a relief, and perhaps even save a couple of folks from foreclosure. I would be curious to see if it produces any positive cash flow for investors in my network.

Real Estate Investing in 2008

Hello fellow real estate investors. We are MeetMOJO. We are two real estate investors and one techie, who are passionate about bringing about change in real estate investing, making things more open and transparent, and empowering investors to partner and collaborate more efficiently, with the help of online tools. So we are building a couple of tools to help the investing community out. I have to admit that my partner Stan has many many more years of experience than me. I got into investing a couple of years ago, and was overwhelmed with lack of online resources. So I decided to solve these problems for beginning investors, to reduce confusion and increase efficiency.

 

Companies like Zillow and Trulia provide some valuable information as far as property valuation, comps, and other neighborhood info, as well as available MLS listings. But there are so many other data points that investors look at. And overall, this information seems to be extremely disaggregated. So we are looking to aggregate all the information relevant to investors, into one place, and package it into useful analytical tools. So as we build our product and release various modules, we encourage you to contribute feedback, so that we can “hit the nail on the head” and provide the most value to the community.

 

Despite the current state of the economy and real estate in particular, we know that savvy investors are thinking ahead and going out and finding cash-flow-positive deals now. As the market continues to decline (in many, but not all, areas), the next couple of years are going to be instrumental in creating wealth for real estate investors. With foreclosures on the rise, banks are stuck with more housing inventory than ever before, and are more willing than before to do short sales. Also, due to the glut of houses on the market, properties are competitively priced. Since the main principle of all investing is to buy low and sell high, while receiving cash flow in the meantime, this is a great time to buy low-priced properties. This is the time for all investors, beginners and advanced, to either start or expand their real estate portfolios. Which is why we are here, to put the right resources within an arm’s reach for investors, as well as to empower partnerships and enhance collaboration.

 

So please add your thoughts about the market in general and ask questions of us and the investing community that we are in the process of building. And don’t forget to tell us what tools you would like to see more of online. MeetMOJO is for investors, by investors!