Archive for November, 2008

Someday soon we may have to turn back the clock on home lending

This is my column for this week from the Arizona Republic (permanent link).

 
Someday soon we may have to turn back the clock on home lending

Furniture stores are offering weekly payments. Department stores and jewelry stores are making Christmas easier with layaway plans.

Check the calendar. Did someone dial the clock back to 1968?

Not quite, but the credit crunch has got us looking backwards in time to try to remember how we used to do business, back before easy credit made things so easy.

Here’s the dirty little secret no one shared with you: For many, many years, the business of America has been credit.

Car dealerships don’t sell cars, they sell financing, selling your loan at a discount as soon as your tires hit the pavement.

Furniture stores don’t sell furniture, they use your desire for new furniture to get you to sign a promissory note.

One of the best protections of your financial interests is called Regulation Z. The Z reportedly stands for Zales, the easy credit jewelry store.

New home builders are in the same game. That’s why the incentives are so much better if you use the builders’ lender.

And that’s why there’s no interest for the first six months. Or no payments at all for the first two years. And all it takes is one quick signature…

But those days are done. Consumers — and corporations — are defaulting on debt like never before in history. The buyers of promissory notes aren’t buying any longer. Instead, they’re in Washington begging for bailouts.

And that leaves the furniture stores and the jewelry stores back in the merchandise business. They need to come up with ways to get people with no money to part with what little they have — a little at a time — in order to have any sort of cash flow at all.

And all this will come to real estate, too. We still have easy credit, but when interest rates start to climb, we’ll see our own kinds of “old fashioned” financing arrangements: Seller carrybacks, land contracts, wraps, lease purchases, etc.

We may be headed into tough times, but we still have a roadmap from 1968 to show us how to sell actual economic values and not just easy credit.

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The bottom of the Phoenix real estate market may be in sight — but, alas, the end is not near

This is from my Arizona Republic column (permanent link):

When will the Phoenix real estate market finally hit bottom?

Believe it or not, I can answer that question with a high degree of precision: When the number of homes being added to the available inventory each month is generally lower than the number of homes sold each month.

But that’s a sleight of hand, isn’t it? I can’t say which month on the calendar will be the market’s nadir, I can only tell you what kind of market activity to watch for.

So here’s one way of looking at things. A newer suburban tract home in the West Valley is selling for $100 a square foot, on average. Practically speaking, this makes new home building unprofitable. Very few new homes will be built, so that source of new inventory is cut off for now.

Meanwhile, various loan workout programs are depleting the foreclosure pipeline. Where before a house might be offered as a short sale and then as a lender-owned home, now there will be an interregnum for the workout. What had been a gusher of lender-owed homes may slow down to a trickle, at least for the next few years.

Meanwhile, the low prices of currently available lender-owned homes are providing incentives for monied investors to come to Phoenix to snap up bargains. The nationwide economic slowdown might put the brakes on our normal in-migration patterns, but if people do move here, they’re going to be soaking up inventory as well.

So we should see some slowing in newly-listed homes, and we have upticks in demand. Are these enough to stop the general decline in home values in the Phoenix market? Ask me in three months.

But even if they are, we’re very far from being out of trouble. The loan workouts, particularly, may well keep home prices from plummeting. But because they will stretch out what in most cases will be an unavoidable foreclosure process, they will probably keep home prices low for years to come.

Buy and hold? No problem. Profit on resale? Don’t bet on it, not for a while.

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A workout loan can be a win-win solution to avoiding foreclosure

This is my column for this week from the Arizona Republic (permanent link).

 
A workout loan can be a win-win solution to avoiding foreclosure

We talked last week about lender “workout” loans — a scheme lenders have come up to keep homes from falling into foreclosure. The premise is simple: If you can’t pay your mortgage, the lender will write you a new loan that anyone could pay.

I’m not kidding. Let’s say you bought a house in 2005 for $300,000. If you put nothing down, your payment might be $1,500 a month — not counting taxes and insurance. But the market value of the home is now $150,000 — a $750 mortgage payment.

As an investment, your home isn’t performing all that well. You bought at the top of the market, and you probably can’t even sell at a loss.

Worse news: Your hours at work have just been cut back.

You’re not in foreclosure. You’re making your payments. But you are an excellent candidate for what lenders call “jingle mail” — mailing in your keys and your deed. This would wreck your credit — for a while — but you’re looking at wrecked credit anyway.

But wait. Your lender’s workout department wants to speak to you before you do anything rash. If you qualify — which means if you have income — they might suggest something like rolling both of your mortgages into a new interest-only third mortgage at a very low interest rate.

Your existing monthly obligation of $1,500 will accrue month-by-month as new debt by negative amortization. In two or three or five years, you will resume paying on your old debt while you continue to pay down the new debt accrued on the third mortgage.

If this sounds silly, it’s because it is. The lenders are doing everything they can to make bad debt look good — temporarily. But a workout could be a win-win for you. If the market rebounds strongly, you can refinance all three notes. And, if not, you will have lived almost rent-free for the next few years before you lose the home in foreclosure.

P.T. Barnum said there’s a sucker born every minute. But who would ever expect to find suckers running our banks?

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Restoring a bargain-priced lender-owned home is easy — if you have cash — but a HUD 203k rehab loan makes it easy even if you don’t

This is my column for this week from the Arizona Republic (permanent link).

 
Restoring a bargain-priced lender-owned home is easy — if you have cash — but a HUD 203k rehab loan makes it easy even is you don’t

Last week we talked about troubled homes and how they can be restored to livability. That’s fine if you’re an investor with pockets full of cash. But what if you’re an ordinary home-buyer? How can you pick up a bargain-priced home and then refurbish it to its former homey comfort?

If you’re buying with an FHA loan, chances are the home is going to have to be at least partially restored before you can close on it. FHA loans require a more-rigorous appraisal, and any defects rendering the home uninhabitable will have to be corrected before you can proceed.

So if the range is missing from the kitchen, it will have to be replaced. If the water heater is broken, it will have to be repaired. If the pool is green, it will either have to be restored to swimmable condition or drained.

Who is responsible for these repairs? Normally, habitability issues would fall to the seller. But most foreclosure properties are sold “as-is” — take it or leave it. If you have cash, you can pay for the repairs prior to close of escrow and then move in as planned.

But what if you don’t have that kind of money?

One solution is to write your repair issues into your purchase contract. If the seller agrees to restore the pool and replace the range, you’ve dealt with the habitability problem in advance.

Another option is to take advantage of HUD’s 203k rehabilitation program. With a 203k loan the loan underwriter can attach what amounts to a construction loan onto the primary purchase loan. So you could buy a lender-owned home for $100,000 and finance an additional $10,000 to refurbish the kitchen after close of escrow. The appraiser will assess the value the home will have after the improvements have been made.

As you might expect, the fine print is extensive, but for an FHA 203k loan in Phoenix your purchase price plus rehab costs can run as high as $362,000. At 3.5% down, that’s an easy way into a nicely upgraded home.

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