BluegrassForeclosure.com

RealtyTrac.com raises interesting questions for 2010.

Question 1: What’s the outlook for foreclosure activity in 2010?
It’s likely that we’ll set a new record in terms of overall foreclosure activity for the fourth consecutive year.

Question 2: Will we see a flood of REOs?
Investors, home buyers and real estate professionals have all been anxiously awaiting a tidal wave of REOs for the past two years. Instead, inventory levels have remained frustratingly low, even in some of the hardest-hit foreclosure markets. Expect more of the same in 2010.

Question 3: Will there be a surge in Short Sales?
A big frustration for potential foreclosure buyers has been the difficulty in buying a property via short sale. Agents have questioned why banks reject a short sale offer 20 percent below the mortgage amount only to spend tens of thousands of dollars to foreclose on the home and then sell it as an REO at a 50 percent discount.

Question 4: Is now a good time to invest in foreclosures?
What all of this means to foreclosure buyers and investors is that the process will require more diligence, persistence and patience. But there has never been a market with as much — or as varied — inventory to choose from, and the combination of deeply discounted pricing and historically low interest rates make many deals once-in-a-lifetime opportunities.

From TheNewAmerican.com:

the Commerce Department reported that new home sales dropped more than 11 percent in November. Home builders have 235,000 homes for sale, the lowest inventory since April of 1971.

Classical economic theory holds the reasonable position that face of uncertainty producers don’t produce, consumers don’t consume, and investors don’t invest. Until confidence in the future is restored, producers, consumers, and investors will continue to hunker down.

Here are some of the uncertainties they are facing:

1.  Banks are not lending: Why should they? With short-term interest rates at zero, and two-year Treasury notes paying almost 1 percent, banks can make 1 percent with zero risk (and by using leveraged derivatives trading, these risk-free gains can be greatly multiplied). This is one of those “unintended consequences” of the Fed holding interest rates so low.

2.  Tax credits expiring: Home buyers who are enticed to move up their timetable in purchasing a new home are merely borrowing from the future. Once the credits expire, the underlying weakness in the housing market will again manifest itself. This was seen following the end of the “Cash for Clunkers” program when new car sales sagged afterwards.

5.  Unemployment concerns: Even though job losses and layoffs appear to be slowing, the total level of employment is lower than it was before the economy entered the last recession in 2001. Put another way, all of the job growth over the past nine years has been virtually wiped out by the current recession. And when that last recession ended in November of 2001, it wasn’t until February of 2005 that all the jobs lost in that recession were finally replaced. According to an MSNBC study, this time it will take more than six years to make up the losses from this recession. It will take years to restore consumers’ confidence to the point where they will willingly add “convincingly to GDP [Gross Domestic Product].”

6.  Jobless benefits in jeopardy: In another study, 25 states have already run out of unemployment money, and an additional 15 will run out in less than two years. This is resulting in some states cutting benefits while raising taxes on small businesses at the worst possible time.  For instance, a Kentucky task force recommended cutting benefits by 9 percent and delaying payments to recipients by a week. And in Indiana, “There’s immense pressure, and it’s got to be faced,” said state Representative David Niezgodski.  “Our system [is] absolutely broke.”

8.  Commercial real estate: This market is still headed down. New construction is not expected to rebound before 2011, according to Global Insight. And a credit crunch looms over the owners of commercial properties as they try to refinance mortgages secured during the bubble. With tenants either leaving at the expiration of their leases or demanding significant reductions in their current lease payments, owners will face increasing difficulties in meeting lenders’ demands.

Unfortunately, I don’t have a perfect crystal ball, but here are the few things that might happen regarding foreclosure, REO, and other real estate investments.

1.  Home prices should stabilize.  Here is why from DSNews.com:

The second half of 2010 will be a time of stabilization or a “renewed leg down” in housing, and it all depends on how aggressively the industry can rein in the swell of foreclosures, according to a new study from the research team at Credit Suisse.

“We estimate that roughly 3.2 million foreclosures must be prevented in 2010 for home prices to stabilize or potentially tick up,” the institution’s analysts wrote in their report. The researchers called the feat an “uphill challenge,” with a very narrow path for success carved out by government programs.

2.  Foreclosure rates will continue to rise in the first half of 2010, but should flatten out the second half, as unemployment rates finally stabilize.  Also from DSNews.com:

While delinquencies continue to rise, foreclosures have slowed due to the government’s foreclosure prevention initiatives. At this point, the housing market has achieved a very tentative sense of balance that could swing to either a modest upside or a significant downside, the report noted.

3.  Commercial properties will go into foreclosure and be a good investment.  Again from DSNews.com:

Commercial real estate values in the United States have sunk to their lowest level in seven years, with properties now carrying price tags not seen since 2002. And although they’re still falling, data from Moody’s Investors Service shows that the rate of depreciation has notably slowed.

4.  Pent up Credit demands will raise interest rates.  From Peter G. Miller as posted on RealtyTrac.com:

Increasing interest rates (because pent-up credit demand is huge, unfortunately higher rates also mean more foreclosures).

5. Further complications from state’s having tough budget times.  Also from Peter G. Miller as posted on RealtyTrac.com:

A reduction of state services and employment (because states cannot print money, many states are required to have balanced budgets and tax revenues have fallen).

6. Programs designed to prevent foreclosure finally can’t hold back the tide.

Also, this points to why the foreclosure rate will continue to rise during the first half of 2010.  ARM’s (adjustable rate mortgages) will continue to reset and/or banks simply cannot hold off on not adjusting them any further.  So many ARM’s that have held off will likely go up.

Many loss mitigation programs that had been trying to work out plans, will finally let loose much of the loans that are in default.  These banks will have no choice but to let them go to foreclosure.

The Courier-Journal has an interesting article on investment that are worth taking a second look at, including commercial real estate.

“Commercial real estate — which is now experiencing trouble similar to the housing market — might be a good investment opportunity, [Josh] Gilliam said.

“In that situation, you don’t have distressed properties so much as you have distressed owners,” he said.

People who don’t have millions of dollars to buy property outright can buy into real estate investment trusts — securities that trade on stock markets, he said.

But [John] Roberts said retail bankruptcies and an oversupply of property also means there is “a lot of risk” in commercial real estate.”

In the same article was this little nugget: “the federal government has been buying mortgage-backed securities, pushing interest rates down. In the spring, the rate on a 30-year, fixed-rate mortgage dipped below 5 percent for the first time in Freddie Mac’s Primary Mortgage Market Survey, which goes back to 1971. The rate was 4.78 percent last week.  . . .

. . . “Now is a great time to purchase,” said Adam Hall, a loan officer with Fifth Third Bank and secretary-treasurer of the Mortgage Bankers Association of Kentucky. “Buyers have lots of options.”The low rates have also caused a surge in mortgage refinancing, which makes sense if the homeowner plans to keep the property at least three to five years — long enough to recoup the closing costs associated with getting a new loan at a better interest rate, he said.”

Finally, it looks like the percentages of loans going into default is up as well.  Signs again, that the unemployment rate continues to drive default rates.

As we have already discussed, the State’s budget is in some serious financial straits.  The Courier-Journal reports “Code Red” since it has so many problems.

The Pew Center report, which the article is based on, forecasts quite a few problems for the states for the next decade.

“States will continue to struggle over the next decade because of the combination of the length and depth of this economic downturn, the projected slow recovery and the overhang of unmet needs.”

“. . . Key points from the Pew report shine a light on next best practices: diversifying a state’s economy. Aligning revenues and expenditures; rethinking caps, laws and amendments that prevent lawmakers from being able to act; lawmakers stepping up and making the tough decisions demanded by this economic crisis.”

Diversification of the economy should be priority number one, but that supposes we have an educated workforce that will lead the way into knowledge based, information jobs.

I have yet to see a legislature that doesn’t try to pass the buck, so the question is, Will the Kentucky Legislature make the tough decisions needed to right the ship in the upcoming session?  So far I haven’t seen any bills that have been introduced to tackle the problem.  If there are any, please let me know.

All of this begs the question, is the State Budget Code Red?  Or simply Code Blue – dead and needing some serious life support?

The foreclosure rate is not likely to go down anytime soon.  In fact, it appears that not only will it rise slightly, it is starting to hit individuals with good credit scores.  Up to now, most of the foreclosures were in the subprime range.  However, not any longer.  The crisis is slated to last well into 2010.

With no end or relief in sight for the unemployment rate, there is no alternative but for the foreclosure rate to begin creeping into individuals with good credit.

“The latest evidence was a report Thursday that a rising proportion of fixed-rate home loans made to people with good credit are sinking into foreclosure. . . . The report from the Mortgage Bankers Association also found that 14 percent of homeowners with a mortgage were either behind on payments or in foreclosure at the end of September. It was a record-high figure for the ninth consecutive quarter.

The data suggest the housing market and the broader recovery will remain under pressure from the surge in home-loan defaults, especially as unemployment keeps rising.

. . . But analysts say there are too many foreclosed homes that have yet to be dumped on the market and expect further price declines.”

Read the full article in the Courier-Journal.  If you are looking for good investments, you need to get to know your local bank’s REO department.

This shouldn’t be a shocker that many states are in fiscal trouble, including Kentucky.  Kentucky made the top 15 list of states in the most trouble as reported by CNNMoney.com.  Not something we need to be known for right now.

“The list is based on several factors, including the loss of state revenue, size of budget gaps, unemployment and foreclosure rates, poor money management practices, and state laws governing the passage of budgets. . . .

. . . In a separate study released Wednesday, the Center on Budget and Policy Priorities found that states will likely have to make steep cuts in their fiscal 2011 budgets, which start next July 1 in most states. That’s because the critical federal stimulus dollars will run out by the end of 2010.”

So what is it going to be?  Raise taxes and pinch an already over-burdened middle class?  Or, slash critical services, like education, which are needed to re-train current workers and attract knowledge workers in the new information economy?  Or, the third option, stick your head in the sand, make no hard decisions, and hope that somewhere down the line someone else does it for you . . . You decide which is most likely . . .

UPDATE: similar article, giving more detail on why states are in such trouble.

UPDATE II:  here’s the full report from the Pew Center on the States.

RealtyTrac is reporting that foreclosure filings dipped in October, from September both nationally and in Kentucky.  From the Courier-Journal.

“In Kentucky, there were 1,164 homes in some stage of foreclosure last month, or one in every 1,638. That was down 9.84 percent from September, but more than double the rate of a year earlier.  Statewide filings have been up and down in recent months, with 1,234 in July and 1,101 in August before rising in September and falling in October.”

As pointed out, there are several factors contributing to the decline.  Mostly, it is a combination between banks evaluating each situation and scrutinizing it to determine if there is something that can be done.  Also, states are taking actions requiring more and more lenders look at mediation before judgment can be entered and the home goes to the auction block.  Finally, more and more work-outs are being performed, as each party is looking to try and save the deal.

As you can see, these are great band-aids to be placed on the problem, but none of them addresses the underlying problem, the fact that unemployment rate continues to rise slightly and seems to be holding steady now at about 10% with more and more people taking longer and longer to find a job.

We are still losing jobs, people are not being hired, and its taking longer to get re-trained for other jobs.  Plus, many states are beginning to look at budget measures whereby more and more folks are being added to the unemployment rolls, which is going to massively strain states’ fiscal year planning which will start soon.

Having said all that, the foreclosure rate may have dipped, along with properties that have actually gone to sale, but we are certainly not anywhere out of the woods yet and probably won’t be for awhile.

More and more 3Q reports coming out suggest that the foreclosure rates are possibly declining, but still significant across the state. Community Trust reports the following:

“Nonperforming loans decreased $14.4 million during the third quarter 2009 to $45.2 million compared to $59.6 million at prior quarter end and $49.3 million at September 30, 2008. The decrease in nonperforming loans was in both the 90 day and accruing and the nonaccrual classifications. Nonperforming assets, however, increased $1.8 million from prior quarter-end, June 30, 2009, and $23.0 million from prior year quarter-end, September 30, 2008, as a result of increased other real estate owned.”

Other portions of their 3Q report suggest that they are still making loans, but not in the residential sector.

“Loan growth occurred during the quarter in the residential and consumer loan portfolios with residential loans increasing by $23.4 million and consumer loans increasing by $18.5 million.  The commercial loan portfolio declined by $19.4 million during the quarter.  Year-to-date loan growth of $54.0 million consisted of growth in the commercial loan portfolio of $12.8 million, growth in the consumer loan portfolio of $45.1 million, and a decline in the residential portfolio of $3.9 million.”

Read the full report.

More 3Q reports.  I think it is important to get a snapshot from banks to see where we are heading in the final few months of the year and for next year as well.  FHL reporting the following:

“At September 30, 2009, 98 percent of our mortgage-backed securities were issued by Fannie Mae or Freddie Mac, which we believe have the backing of the United States government. Only 2 percent ($211 million) of the holdings were in private-label mortgage-backed securities, which comprise high-quality residential mortgage loans issued and purchased in 2003 and which were rated triple-A at September 30, 2009. The underlying collateral has a de minimis level of delinquencies and foreclosures as reflected in the average serious delinquency rate (loans at least 60 days past due) of 0.54 percent of total principal, while their average credit enhancement stood at 7.5 percent. We expect to experience no credit losses on any of our mortgage-backed securities.”

They are projecting that they should be able to hold firm for now.  It will be very telling once the first time home buyer’s credit finally runs out.  All bets are off though, if Congress extends the credit and/or broadens who can use it, which is a distinct possibility.

Read FHL Bank’s full report.