"An appeaser is one who feeds a crocodile, hoping it will eat him last." -Winston Churchill
This is a quote that I believe sums up in a nutshell how many of the nation's lenders are handling their responsibilities in today's credit crisis. Thus, my blog this week is of the editorial nature, as I'm not especially happy with the way lenders are managing situations they may have created by making bad loans to begin with.
I've been reading numerous articles about the deepening mortgage crisis, and I am continually saddened by the stories of individuals, families, and even small home builders who have been swept away by the ever increasing wave of foreclosures. I read one article that likened an individual homeowner attempting to work with lenders to negotiate alternatives for refinancing or freezing their monthly mortgage payment to be like trying to"turn a big ship." That's when I came up with the idea of calling this big ship that is collectively the lender "The Mortgage Mountain." For a lot of hard working people, their monthly mortgage payment seems like an insurmountable mountain that many of them will never get to the top of. I think that lenders owe borrowers a rope and some hooks to help them climb the mountain, rather than being of the mindset that they got themselves into this mess and they should be able to climb it alone.
While it's certainly true that the government seems to be making a concerted effort to stem the tide of foreclosures by offering one-on-one assistance to borrowers that may be in various stages of default on their loans with programs like Hope Now, lenders ought to step in and offer to help borrowers- without being told that they have no choice. After all, the lenders were the ones making loans that they in many instances had no solid idea if the borrowers would or could re-pay. The defining criteria of loan approval for these loans was based solely on the lender's own profit margins and bottom lines, not an ability to re-pay them, as it should have been based upon. These government programs that have been set up to assist borrowers in trouble need to make lenders accountable if they are going to achieve what they were supposedly established to achieve.
There are no easy answers. That is for sure! Even if all of the current sub prime and exotic mortgages were reset to 30 year fixed rate loans at lower interest rates, undoubtedly many borrowers would still be in over their heads. Currently, much of the problem may be attributed more to declining market values than bad loans. What incentive do borrowers have to refinance and stay in their homes when they are upside down on their mortgage and owe more on the house than it's worth in today's market? Plenty it seems for many borrowers. Pride for one thing. Pride of ownership, pride that when you make a promise, you keep it. After all, that's the American way. We were taught that you don't walk away from your obligations. It's amazing how tenaciously many homeowners are struggling to hold onto their homes rather than to take the easy route and walk away from them.
Thankfully, homeowners can find many resources to aid in their battles to keep their homes. Online help is available, in many forms. See this website for an example of one way that grassroots organizations are taking shape to offer creative advice and possible solutions to stave off the tide of foreclosures. Lenders should be thrilled at homeowners who are fighting to keep their homes. They should jump right into the ring with the homeowner to do everything they can to try and make it manageable for the homeowner to refinance at a comfortable rate, so they can stay in their home. In the long run, helping borrowers instead of turning their backs on them has the potential to save the lenders a huge amount of money and headaches by having fewer properties to foreclose on. Fewer foreclosures also means possibly preventing a further erosion of home values. A sea of foreclosures has proven to do nothing for the real estate market but weaken buyer demand and cause a deeper erosion of property values.
A foreclosure can be a life changing experience for many people. Some liken it to a death or a divorce. Surely a financial catastrophe of this magnitude must feel like their world is crumbling to many people. We as real estate agents often times are caught in the middle. Right now in Tucson, many homeowners are attempting to sell their homes in what is called a "short sale." A short sale is when a homeowner who is behind on their mortgage tries to sell their house prior to it foreclosing. In a short sale, the lender agrees to accept less than what is owed on the loan to avoid the expense that it would cost the lender to foreclose on the property.
Short sales are difficult for Realtors because lenders are not very communicative or direct. They usually take much longer to close escrow than regular transactions, leaving the buyer of the house feeling like they were left hanging out to dry. There is one agent in my office who has been waiting to hear back from a lender of a property that a client is purchasing as a short sale for eight weeks. I find this almost impossible to comprehend in today's era of modern technology. Messages can be sent across the world in a matter of seconds. How can a financial entity be this inept at dealing with its accounts? I can only pose that as a rhetorical question for obvious reasons! In many instances, lenders will try to avoid compensating the real estate brokers for their participation in a sale (or else they will drastically reduce their compensation without cause or explanation), simply because they control the money. I know many agents who have worked extremely hard on these types of transactions, only to be burned by the lender in the end.
Additionally, lenders have been know to say they will agree to a short sale, and then once the transaction is complete, they file a deficiency judgement against the borrower in default in an attempt to recover the money they are owed. I have heard from inside sources that the only recourse a borrower has in an instance like this is to file personal bankruptcy. In January of 2009, many people who were either foreclosed on or sold their homes in short sales may be in for a rude awakening when they receive 1099's saying that they had miscellaneous income on the forgiven portion of the loan, and they may owe the IRS income taxes on the forgiven portion of the loan.
All in all, it's a difficult time for many homeowners. There are two silver linings right now for buyers. One is that home prices have dropped considerably, much of the decline being attributed to increased foreclosures and the ripple affect of them. In a few depressed areas of the nation, prices have fallen as much as 40%. Here in Tucson, prices have come down as much as 20% in some areas from their 2005-2006 peaks. Buyers can get a home for much less money, couple that with the second silver lining- the return of FHA financing. The real estate market won't be able to turn around until three things happen: 1) the market must absorb the existing inventory, 2) buyer demand must increase, and 3) lenders must find a way to help distressed homeowners and prospective borrowers. The government should find a way to make lenders accountable for being part of the solution. Otherwise, the government will become the proverbial appeasing alligator too.
Please feel free to call or e-mail me with your questions and/or concerns, and of course if you would like more information about the Tucson real estate market, or are thinking about buying or selling a Tucson property.
Written by Sarah Ley
BSBA, ABR, CRS, CNHSA
Tucson, AZ REALTOR with
Long Realty Company
Direct: (520) 404-0544
http://www.sarahley.longrealty.com/
sley@longrealty.com
Sunday, March 30, 2008
Monday, March 10, 2008
Where do we go from here in Tucson real estate?
It seems to be the question flogging every one's mind these days- where is the Tucson real estate market headed? Let's face it, we are all affected by this down real estate market- whether we're looking to buy or sell a home in today's market or not. It affects consumer spending and consumer confidence, which in turn affects job creation and the overall economy. It's become an ongoing downward cycle, which is further perpetuated by sensationalized articles being churned out by our local media- whose goal is not to state the facts, but to sell newspapers. Yes folks, the real estate market (both nationally and locally) is a topic that's weighing heavily on most people's minds these days.
Consider this scenario, then consider the ramifications of it when you multiply it by the many homeowners here in Tucson (and nationally) who are faced with very similar predicaments. Joe (not his real name) bought his first house in the summer of 2005. It seemed to be a great time to buy. All his friends told him that owning a home was about the best investment decision a person could make. They also told him how easy it was to buy the home with no money down- he could even finance his closing costs. Why would he be so naive as to keep renting, when buying was a golden opportunity? His credit wasn't the greatest, but he could still qualify for 100% financing with a stated income, no doc, sub-prime loan. Even if something changed in the next few months, and he decided that the payment was more than he could handle- he could flip the home and make a lot of money. Everyone was doing it. It was so easy to buy and sell real estate.
So, as the story goes- Joe bought his first home. He paid $240,000 for it, which everyone said was a steal, considering that the house next door, which was the same floor plan just went under contract for $248,000. Joe's house was a 3BR/2BA, about 1,400 square feet in a popular neighborhood on Tucson's Northwest side. Prices were going up at the rate of about $5,000 a week with all the out of town buyers and investors from California. These real estate investors were coming by the bus load to buy 'investment properties' in Tucson- many of them utilizing 100% financing that was so ubiquitous. Joe saw himself as just plain lucky to get in on the action when he did.
Flash forward three years. Joe's 3/1 Adjustable Rate Mortgage (ARM) just kicked up to 10.5% a few months ago. In addition to his mortgage, Joe's expenses have gone way up, as inflation has caused prices to rise faster than wages. It's March of 2008 and Joe is in a bind. He can no longer afford his monthly mortgage payment. He talks to a real estate agent, only to discover that his house would fetch about $190,000 in the current market, and it could take six months to a year to sell it even at this price- given the huge inventory of homes on the market. This puts him in the hole $50,000 from what he owes on the house. Not to mention the closing costs and commissions involved in selling the home. How could this happen? How will he pay for this? What are his options? Who can he turn to? Joe is a very sad predicament, but a seemingly common one these days, as runaway interest rates and declining home prices are sending huge numbers of homeowners into a desperate downward spiral. These homeowners are upside down on their mortgages, many of them with no place to go- except foreclosure, and then personal bankruptcy. It's a horrible and sad spiral that is threatening to derail many homeowners, both here in Tucson and nationally.
Going from the microscopic to the macroscopic realm, nationally some estimates predict that mortgage losses may reach as high as $400 billion dollars over the next two years. It seems that about 40% of all people who did 100% financing between 2005-2007 are either in some stage of foreclosure or are behind on their mortgages. $400 billion may sound like a huge overestimate, but to put it in perspective, consider that there is a total of about $11 trillion in US mortgages that are outstanding. Our national and local economies are very threatened by this fact. The methods of this madness are detailed in a recent report stemming from the US Monetary Policy Forum's Conference on February 29, 2008. The title of this report by David Greenlaw et al. is, "Leveraged Losses: Lessons from the Mortgage Market Meltdown." The report basically arrives at the projected losses of $400 billion by using several different models. The first looks at the loan performance of certain sub-prime and other mortgage loans, adjusted for declines in home prices. A second model uses market prices to obtain a loss estimate based on current real estate values. While a third model looks to historical data in areas that have previously been hit hard by big real estate declines, i.e. California, Texas, and Massachusetts. The most noteworthy item about this report is that all three models arrived at almost the same prediction for losses- $400 billion.
There are many financial and economic implications here, but the biggest one, and the one that has the possibility to affect the market the most is that the rising tide of lender losses will further erode lender capital, and this will inevitably cause lenders to trigger further 'belt tightening' out of pure necessity. This means that it is going to become more difficult for buyers to get a mortgage, but also that lending institutions are going to be a lot tighter fisted with their lending practices then they ever were. Anticipation of this necessary belt tightening is one of the main reasons why last week FHA (a government backed loan product that requires only a 3% down payment) increased their conforming loan limits to $316,250. FHA is responding to the tightening and restrictiveness of mortgage lenders to try and prevent the economy from going into a tailspin. If lenders make it harder for borrowers to borrow money to get a mortgage, then the buyer pool is going to shrink. The Federal Reserve has been trying to step in with a remedy of appealing to banks to borrow money from the Fed to stimulate the economy. Many banks are not responding, and that's causing already stalling markets to stagnate.
How does this affect today's home buyer, and to answer the question posed in the title of this post, "Where do we go from here?" In a March 9, 2008 Wall Street Journal article geared to first time home buyers entitled, "A Good time to buy a house- if you can," it states that today's mortgage lenders want borrowers to have no more than 28% of their income towards paying their mortgage payment and are expecting down payments of at least 5%. Some experts predict that in many markets, a first-time buyer will require as much as a 10% down payment. These changing standards are pulling many would be buyers out of the mix, creating what the Federal Reserve terms an 'adverse feedback loop,' or intensification of the factors causing the decline of investments and consumer spending . The Fed is meeting again on March 18th, and is expected to lower the funds rate by as much as 50 basis points to hopefully curtail an adverse feedback loop. Mainly, today's buyer needs to know- how does this affect me? So here goes- my two cents...
A few things to keep in mind if you are in the market to buy a home in Tucson right now.
1) Home prices have come down, in some areas as much as 20% from their 2005 peak, making buying a home in Tucson a lot more affordable than it was two to three years ago.
2) Interest rates are still relatively low, helping to keep your payment more affordable.
3) There is a massive selection of homes to choose from (both new homes and resales). The supply of homes on the market has the possibility to help you to get a better price and terms on your new home.
4) If you're buying the home to live in (your primary residence), and don't plan on selling it for 3 to 5 years, home ownership may make a lot more sense to you then renting, as you can take advantage of the tax savings on writing off your mortgage interest. You are not throwing away money on rent, and it will be your home, to furnish and stylize as you see fit.
5) Most importantly, get a professional Realtor to help you sort through the home buying maze!
In my opinion, it is a great time to buy a home, if it makes sense financially to you, and you're not trying to see your home as an investment. Remember, your home is a roof over your head. It's a place to live. It's not a piggy bank, nor should it be the only egg in your nest egg basket.
Please don't hesitate to call me with any questions about this posting, or about the Tucson market in general.
Written by Sarah Ley
BSBA, ABR, CRS, CNHSA
Tucson Realtor with
Long Realty Company
(520) 404-0544
sley@longrealty.com
http://www.sarahley.longrealty.com/
Consider this scenario, then consider the ramifications of it when you multiply it by the many homeowners here in Tucson (and nationally) who are faced with very similar predicaments. Joe (not his real name) bought his first house in the summer of 2005. It seemed to be a great time to buy. All his friends told him that owning a home was about the best investment decision a person could make. They also told him how easy it was to buy the home with no money down- he could even finance his closing costs. Why would he be so naive as to keep renting, when buying was a golden opportunity? His credit wasn't the greatest, but he could still qualify for 100% financing with a stated income, no doc, sub-prime loan. Even if something changed in the next few months, and he decided that the payment was more than he could handle- he could flip the home and make a lot of money. Everyone was doing it. It was so easy to buy and sell real estate.
So, as the story goes- Joe bought his first home. He paid $240,000 for it, which everyone said was a steal, considering that the house next door, which was the same floor plan just went under contract for $248,000. Joe's house was a 3BR/2BA, about 1,400 square feet in a popular neighborhood on Tucson's Northwest side. Prices were going up at the rate of about $5,000 a week with all the out of town buyers and investors from California. These real estate investors were coming by the bus load to buy 'investment properties' in Tucson- many of them utilizing 100% financing that was so ubiquitous. Joe saw himself as just plain lucky to get in on the action when he did.
Flash forward three years. Joe's 3/1 Adjustable Rate Mortgage (ARM) just kicked up to 10.5% a few months ago. In addition to his mortgage, Joe's expenses have gone way up, as inflation has caused prices to rise faster than wages. It's March of 2008 and Joe is in a bind. He can no longer afford his monthly mortgage payment. He talks to a real estate agent, only to discover that his house would fetch about $190,000 in the current market, and it could take six months to a year to sell it even at this price- given the huge inventory of homes on the market. This puts him in the hole $50,000 from what he owes on the house. Not to mention the closing costs and commissions involved in selling the home. How could this happen? How will he pay for this? What are his options? Who can he turn to? Joe is a very sad predicament, but a seemingly common one these days, as runaway interest rates and declining home prices are sending huge numbers of homeowners into a desperate downward spiral. These homeowners are upside down on their mortgages, many of them with no place to go- except foreclosure, and then personal bankruptcy. It's a horrible and sad spiral that is threatening to derail many homeowners, both here in Tucson and nationally.
Going from the microscopic to the macroscopic realm, nationally some estimates predict that mortgage losses may reach as high as $400 billion dollars over the next two years. It seems that about 40% of all people who did 100% financing between 2005-2007 are either in some stage of foreclosure or are behind on their mortgages. $400 billion may sound like a huge overestimate, but to put it in perspective, consider that there is a total of about $11 trillion in US mortgages that are outstanding. Our national and local economies are very threatened by this fact. The methods of this madness are detailed in a recent report stemming from the US Monetary Policy Forum's Conference on February 29, 2008. The title of this report by David Greenlaw et al. is, "Leveraged Losses: Lessons from the Mortgage Market Meltdown." The report basically arrives at the projected losses of $400 billion by using several different models. The first looks at the loan performance of certain sub-prime and other mortgage loans, adjusted for declines in home prices. A second model uses market prices to obtain a loss estimate based on current real estate values. While a third model looks to historical data in areas that have previously been hit hard by big real estate declines, i.e. California, Texas, and Massachusetts. The most noteworthy item about this report is that all three models arrived at almost the same prediction for losses- $400 billion.
There are many financial and economic implications here, but the biggest one, and the one that has the possibility to affect the market the most is that the rising tide of lender losses will further erode lender capital, and this will inevitably cause lenders to trigger further 'belt tightening' out of pure necessity. This means that it is going to become more difficult for buyers to get a mortgage, but also that lending institutions are going to be a lot tighter fisted with their lending practices then they ever were. Anticipation of this necessary belt tightening is one of the main reasons why last week FHA (a government backed loan product that requires only a 3% down payment) increased their conforming loan limits to $316,250. FHA is responding to the tightening and restrictiveness of mortgage lenders to try and prevent the economy from going into a tailspin. If lenders make it harder for borrowers to borrow money to get a mortgage, then the buyer pool is going to shrink. The Federal Reserve has been trying to step in with a remedy of appealing to banks to borrow money from the Fed to stimulate the economy. Many banks are not responding, and that's causing already stalling markets to stagnate.
How does this affect today's home buyer, and to answer the question posed in the title of this post, "Where do we go from here?" In a March 9, 2008 Wall Street Journal article geared to first time home buyers entitled, "A Good time to buy a house- if you can," it states that today's mortgage lenders want borrowers to have no more than 28% of their income towards paying their mortgage payment and are expecting down payments of at least 5%. Some experts predict that in many markets, a first-time buyer will require as much as a 10% down payment. These changing standards are pulling many would be buyers out of the mix, creating what the Federal Reserve terms an 'adverse feedback loop,' or intensification of the factors causing the decline of investments and consumer spending . The Fed is meeting again on March 18th, and is expected to lower the funds rate by as much as 50 basis points to hopefully curtail an adverse feedback loop. Mainly, today's buyer needs to know- how does this affect me? So here goes- my two cents...
A few things to keep in mind if you are in the market to buy a home in Tucson right now.
1) Home prices have come down, in some areas as much as 20% from their 2005 peak, making buying a home in Tucson a lot more affordable than it was two to three years ago.
2) Interest rates are still relatively low, helping to keep your payment more affordable.
3) There is a massive selection of homes to choose from (both new homes and resales). The supply of homes on the market has the possibility to help you to get a better price and terms on your new home.
4) If you're buying the home to live in (your primary residence), and don't plan on selling it for 3 to 5 years, home ownership may make a lot more sense to you then renting, as you can take advantage of the tax savings on writing off your mortgage interest. You are not throwing away money on rent, and it will be your home, to furnish and stylize as you see fit.
5) Most importantly, get a professional Realtor to help you sort through the home buying maze!
In my opinion, it is a great time to buy a home, if it makes sense financially to you, and you're not trying to see your home as an investment. Remember, your home is a roof over your head. It's a place to live. It's not a piggy bank, nor should it be the only egg in your nest egg basket.
Please don't hesitate to call me with any questions about this posting, or about the Tucson market in general.
Written by Sarah Ley
BSBA, ABR, CRS, CNHSA
Tucson Realtor with
Long Realty Company
(520) 404-0544
sley@longrealty.com
http://www.sarahley.longrealty.com/
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